A September to remember for the global crude oil market.

Catogory : Announcements

September 2017 was a historic month for the global crude oil market. West Texas rose to $52 and Brent rose to $58 as financial markets finally accepted that Saudi Arabia has been successful in brokering high compliance rates with last year’s Opec and Russia output cut deals. In addition, Hurricanes Harvey and Irma and seasonal refinery maintenance added to demand for crude cargoes even as the US inventory glut eased. Turkey’s threat to militarily intervene in Iraqi Kurdistan if Erbil votes to secede from Baghdad in its referendum added a geopolitical risk premium to the oil market. Saudi Arabia and its GCC allies have managed to offset the surge in Libyan and Nigerian output that was not subject to Opec output cuts. Yet oil’s bull run is only sustainable if Saudi Arabia plays the role of swing producer in an Opec that has cut output by 1.8 million barrels a day.

Saudi Arabia is still the world’s lowest cost oil producer and retains most of Opec’s spare capacity, the source of its colossal power in the global energy market. Yet its oil pricing and production decisions are made in a geopolitical and national security context. Saudi Arabian oil policy has sought to manage the long-term interest of both producers and consumers. This makes perfect sense since a recession in the Western world would only cause a free-fall in the price of oil, as happened in the six months after the failure of Lehman Brothers in September 2008.

Saudi Arabia was horrified as Brent crude prices plummeted from $148 in July 2008 to $38 in December 2008 amid a virtual shutdown in the world’s debt/capital market and a traumatic global recession. Saudi Arabia engineered a four-million-barrel-a-day Opec oil output cut in 2009, the biggest in the history of the group. The kingdom also bore the disproportionate financial cost of the Opec output cut but managed to end the oil-price free-fall. Within three years, despite the Greek debt crisis and the Syrian civil war, Brent crude prices were trading at $100 again. Brent only collapsed in 2014-15 as the US Dollar Index surged, Chinese oil demand sagged and Saudi Arabia refused to defend oil prices at $100 a barrel, as former Saudi oil minister Ali Al Naimi had previously promised to do so. The oil price crash continued in 2015 and early 2016, when Brent fell below $30 amid a dramatic sell off in the Chinese and global stock markets.