Saudi Said To Have Won Big On Cutback Agreement, But Skeptics Warn That Deal Has Yet To Be Honoured

Thursday December 1, 2016

As the market rallies and skeptics consider the outcome of the Organization of the Petroleum Exporting Countries' (OPEC) surprise breakthrough in ratifying its oil cutback deal in Vienna, the biggest skeptic of them all says the agreement is a major win for Saudi Arabia.

John Kilduff, founding partner of Again Capital, who has repeatedly dismissed the efficacy of the proposed cutbacks and OPEC members' willingness to undertake them, told CNBC, "The Saudis really pulled off a victory for themselves ... I think that the most recent sell-off in crude oil scared them all into this; I think they saw what lay ahead if they didn't do this."

The anticipated higher prices resulting from the ratification will presumably facilitate the Saudis' goal of diversifying its economy by, in part, selling a portion of Saudi Aramco in 2017 via an initial public offering.

Michael Cohen, head of energy commodities research at Barclays, remarked, "At the end of the day, what Saudi Arabia is worried about is they wanted to get the engine started on investment: they don't see it starting when oil is at $35 to $45."

As for what transformed a widely perceived impending disaster in Vienna into a supposed success, Helima Croft, head of global commodities strategy at RBC Capital Markets, said, "There was a lot of overnight diplomacy, that was the turning point: the skeptics in the room needed to see the numbers.

"It looks like the Saudis drove the hardest bargain on specificity: they knew what the market needed, and they pushed it through."

Emerging from the Vienna summit on Wednesday, Khalid al-Falih, energy minister for Saudi Arabia announced,  "I think it is a good day for the oil markets, it is a good day for the industry and ... it should be a good day for the global economy: I think it will be a boost to global economic growth."

However, prior to the summit, he told reporters that his kingdom was prepared to accept "a big hit" on production to get a deal done; for the record, that hit constitutes the lion's share of total cuts: a reduction of almost 0.5 million barrels per day (bpd) to 10.06 million bpd - big by the deal's standards, but minuscule compared to the Saudis' recent record production volumes.

Meanwhile, observers believe the next step for industry insiders should be vigilance: Art Cashin, director of UBS's floor operations at the New York Stock Exchange, told CNBC, "Whether [the deal] sticks or not is a completely different thing."

He added, "We'll have to see what the Russians actually do about it," and he went on to express doubts about the deal being honoured: "When nobody can see what's going on, the cheating begins almost immediately."

While Iran agreed in Vienna to cap rather than reduce production, it was previously reported that the Saudis would reject an accord unless all OPEC members, except for Libya and Nigeria, participated in the cutbacks.