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Market share

15 Nov 2016 By Andy Critchlow

Donald Trump may have handed Saudi Arabia an excuse to back out of a shaky pledge to cut oil output. Fears that the U.S. president-elect will supercharge domestic drilling, renege on global climate-change commitments and restore sanctions on Iran mean it is in the kingdom’s best interest to keep the spigots wide open.

The Organization of the Petroleum Exporting Countries (OPEC) is due to finalise a reduction in total production at its next scheduled meeting in Vienna on Nov. 30. The 14-member group wants to limit output to around 32.5 million barrels per day (bpd), compared with current levels closer to 34 million bpd, in a bid to revive prices which have tumbled 42 percent over the last two years. Saudi will have to shoulder the largest share of the cuts if that deal goes ahead.

But Trump’s victory has given the kingdom an opportunity to put its own interests ahead of OPEC’s and protect its share of the global oil market. The cartel’s decision to let oil prices fall two years ago has failed to deliver the hoped-for knockout blow to American production. The U.S. Department of Energy recently revised up its forecast for domestic production to 8.7 million bpd for 2017. Although that is about 1 million barrels fewer than last year’s average, it is probably more than Saudi would like.

Trump’s pledge to cut red tape will lower costs, boosting production further. He has also promised to back out of a global deal to address climate change. That might prompt China and India to rethink their commitments to scaling back their use of fossil fuels. If global oil consumption exceeded OPEC’s own forecasts of 95.6 million bpd next year, the cartel might no longer need to reduce output.

Finally, tougher policies on Iran would limit output growth from Saudi’s major political rival in the Middle East. The Islamic Republic has increased its share of OPEC’s total output to 11 percent since signing a U.S.-led deal to lift nuclear sanctions, while Saudi’s share has remained flat.

Backing out of the OPEC deal would cause prices to fall, but allow Riyadh to defend its market share. Trump might make a convenient scapegoat.


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