2020-03-23 Bloomberg Businessweek

(Martin Jones) #1
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◼ REMARKS Bloomberg Businessweek March 23, 2020

WIKTOR


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OnMarch4,PrinceAbdulazizbinSalman,the59-year-old
Saudioilminister,waslockeddowninhissuiteatthePark
HyatthotelinVienna,preparingforwhatwouldturnoutto
bethemostimportantmeetingofhislife.
A veterannegotiator,theprinceis skilledintheByzantine
diplomacyandbackroomdealsthathavecharacterizedOPEC
sinceitsfounding 60 yearsago.Fewotherscanbridgethe
politicalenmitiesamongoilproducers,whooftenhavelit -
tleincommonotherthantheiraddictiontopetrodollars.
It’sa worldwherea fewbarrelshereorthereina produc-
tiondealoftenmakeallthedifference.“Howcanwework
individingthesethings?”PrinceAbdulaziztoldBloomberg
TVlastyear.“Itis notgoingtobea science.It’sscience,art,
andsensibility.”
ButwhenPrinceAbdulazizmethisRussiancounterpart,
AlexanderNovak,thatdayattheOPECbuildinginVienna,
bothscienceandartfailed.Thetalkswerethepreludetoa
seismicoilpricedeclinethat’sstillreverberatingthroughthe
globaleconomy—acrashthatmayreshapetheenergyindus-
tryfordecadestocome.Andwhatstartedasa pricewarmay
turnouttobea muchmoreimportantstrategicrethinkingof
Saudioilproductionpolicy,asthekingdomseekstomone-
tizeitsgiantpetroleumreservesasfastaspossibleratherthan
shepherdingthatstoreofwealththroughthegenerations.
Sucha shiftwouldfundamentallychangetheeconomicsof
theindustry,usingSaudiArabia’sultralowcostadvantagesto
wina racetothebottom.ForPrinceAbdulaziz’youngerhalf-
brother,CrownPrinceMohammedbinSalman,it wouldrep-
resenta massivegamble:theworld’spreeminentoilexporter
choosingtolivewithlowerlong-termoilprices.
Riyadhhaskeptmumonitsmotivations,butif thesuspi-
cionsofmanyintheoilmarketprovetrue,thisoilwarwill
bea Darwiniansurvivalofthefittest.Astheworldstepsup
thefightagainstclimatechange,thedemandforoilwillpeak
ina fewdecades.SaudiArabiaandRussiawilllikelyemerge
bruisedbutstanding.Manyothers,includingU.S.shalepro-
ducers,willbeindirestraits.
Inthekingdom,thecurrentthinkingis toletfreemarkets
work.If officialsareworriedaboutlowoilprices,theyaren’t
showingit.SaudiArabiais hunkeringdownforonetotwo
yearsofcheapoil,adjustinggovernmentspendinganddraft-
ingmeasurestoprotectthevulnerableamongitscitizenry.
“Weareverycomfortablewith$30,”KhalidAl-Dabbagh,
financedirectorofstate-ownedSaudiArabianOilCo.,told
investorsonMarch16,anopinionwidelyrepeatedinthe
ministriesandroyalpalacesinRiyadh.“Ina nutshell,Saudi

Aramcocansustainverylowoilpricesandcansustainit
fora longtime,andthatis especiallythecasecomparedto
othersinthesector.”
Lookingback,theomensfortheViennameetingweren’t
good.Withoilpricesfallingrapidlybecauseoftheeconomic
impactofthecoronavirusoutbreakinChina,Riyadhwas
pressingMoscowtodeepentheproductioncutstheyimple-
mentedtogetherinlate2019.Cuttingoutputbyonlyanaddi-
tional1.5millionbarrelsa daywouldsufficetorebalancethe
market,PrinceAbdulazizargued.Almosteveryoneelseinthe
OPEC+alliance—22countriesthataccountforhalftheworld’s
output—agreedwithhim.
Novakwasunmoved.Theoilsupplyanddemandoutlook,
theRussiansaidattheViennameeting,wastoocloudy—better
to roll over the existing cuts for another three months and
then decide what to do next. Moscow also felt that output cuts
and higher prices were simply fueling the U.S. shale industry.
Instead, the time had come for lower prices.
With the talks in Vienna at an impasse, Prince Abdulaziz
delivered an ultimatum: Accept the output cuts, or Riyadh
will abandon the deal altogether, unleashing a wave of extra
oil. Novak called what many thought was a bluff, and he
walked out. When he left the OPEC building, he turned to
the television cameras and delivered his counterpunch:
Beginning on April 1, every OPEC+ member country was
free to pump at will.
The shock waves are still being felt. By the estimate of
some traders and consultants, global oil demand is in free
fall, down about 10% from the previous year—the largest
drop ever. “This is an epic fail,” says Bob McNally, founder
of Rapidan Energy Group and a former oil official in President
George W. Bush’s White House.
Riyadh will say Novak started the oil price war, not Saudi
Arabia. But the kingdom was ready for a fight. Unknown to
anyone but a few royals and senior officials in Riyadh, the
kingdom had been preparing precisely for that moment for
several weeks. For the Saudis, Novak’s pump-at-will comment
was a green light to ramp up the country’s own production.
The first sign that something was amiss went largely unno-
ticed, even in the world of oil. Saudi Aramco had set its oil
prices like clockwork at the same time, on the same day of
each month. But without explanation on March 5, a day after
Prince Abdulaziz and Novak met, it didn’t.
When Saudi Aramco finally set its price a few days later,
it was the oil market equivalent of a declaration of war. The
company cut its prices by the most in 30 years, offering
unprecedented discounts to its customers, which include
some of the world’s largest refiners, such as Exxon Mobil,
BP, and Chevron. The refiners also got word that Aramco was
about to increase output significantly, by as much as 25% to
a record of more than 12 million barrels a day. “The Saudis
are looking to intensify short-term pain with the goal of draw-
ing everyone back to the negotiating table to impose a more
favorable supply management deal,” says Roger Diwan, a vet-
eran OPEC watcher at consultant IHS Markit Ltd.

● The Russians may have started the
price war, but the Saudis were waiting
for the opportunity to jump in

● By Javier Blas

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