London — Saudi Arabia will be handed a golden opportunity to seize oil market share if US President Donald Trump reimposes sanctions on Iran.
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* US Secretary of State Pompeo to visit Riyadh
* Saudi Arabia holds 2.5 million b/d spare capacity
* Kingdom boosted output during last Iran sanctions
His decision, expected May 12, on whether to continue waiving sanctions under the nuclear deal could affect up to 1 million b/d of Iranian crude.
With some 2.5 million b/d of spare capacity at its disposal, Saudi Arabia has the oil firepower to fill the gap if required and reinforce its swing producer credentials.
"Saudi Arabia is not likely to sit on the sidelines and let things play out," said Ellen Wald, president of Transversal Consulting and a non-resident scholar at the Arabia Foundation. "Saudi Arabia likes to present itself as the stable, reliable producer, always there to satisfy customer demands, and this is the perfect opportunity to step in."
But, so far, any public reassurances to that end have yet to materialize.
Oil prices have risen more than 30% to nearly $75/b since OPEC and 10 non-OPEC allies led by Russia began their output cuts in January 2017. Saudi Arabia has played a central role holding the coalition together and may still want prices to nudge higher to help fund economic reforms.
As recently as last week, Saudi energy minister Khalid al-Falih was arguing after an OPEC/non-OPEC monitoring committee meeting in Jeddah that the group's mission to rebalance markets with 1.8 million b/d of cuts was far from complete despite the International Energy Agency's declaration to the contrary.
Ahead of Trump's decision on Iran, newly confirmed US Secretary of State Mike Pompeo is scheduled to visit Riyadh over the weekend for meetings with Saudi King Salman and Foreign Minister Adel al-Jubeir that are expected to include discussions on the sanctions.
Iran has revived its output to 3.82 million b/d in March, according to the latest S&P Global Platts OPEC survey, an addition of some 1 million b/d since it struck a landmark nuclear deal with six major world powers in 2015. Any US action is expected to hit Iranian supplies.
Amy Myers Jaffee, an energy consultant and senior fellow at the Council on Foreign Relations, said the US expects Saudi Arabia to pick up the slack despite the mixed messages Falih delivered in Jeddah last week.
"You have the risk of a disruption in oil supply from the war in Yemen, combined with the steps that have to be considered about sanctions on Iran," she said. "In that context, you would expect the Saudis to behave responsibly and talk about supplying customers with the oil they need. Instead they're holding a meeting in Jeddah talking about consumers being able to handle higher prices."
SERVING CUSTOMER DEMAND
Historical precedent suggests the Saudis will act to keep markets well supplied.
The last time the US and the EU prepared to impose sanctions on Iran's crude sector, the kingdom stepped up. As sanctions loomed in January 2012, then-Saudi oil minister Ali al-Naimi took to CNN to pledge the kingdom would make up for any loss of Iranian crude exports, which stood at some 2.2 million b/d and would go on to be halved.
The kingdom has the spare capacity "to respond to emergencies worldwide, to respond to our customer demand, and that is really the focus," Naimi said at that time. "Our focus is not on who drops out from production, but who wants more."
Iranian crude output stood at 3.63 million b/d in 2011 before the sanctions were imposed, according to Platts OPEC survey data, and then averaged 2.86 million b/d from 2012-2015 during the sanctions.
Saudi production rose from 9.33 million b/d in 2011 to 9.82 million b/d from 2012-2015.
Fellow Gulf producers Kuwait and the UAE also had significant gains in output over that period, as did Iraq, which was rebuilding from its devastating war against the Islamic State.
The Iranian sanctions were suspended in January 2016 under the nuclear deal, and by then, OPEC was in the midst of a pump-at-will market share battle, with none of the countries that filled Iran's void dropping their output to make way for Tehran's return.
But the market looks different today.
US shale supplies -- which prompted that market share battle -- are surging and look to continue growing, lessening some of the impact of any new Iranian sanctions.
The Energy Information Administration expects US production growth of about 750,000 b/d from 2018 to 2019.
"I think the USA is doing enough as it is to keep the market supplied with enough oil," said an OPEC delegate, on condition of anonymity.
Even with the OPEC production cuts, Saudi Arabia has gone the extra mile with its quota, giving it more headroom to increase output while still fulfilling its commitment.
Saudi Arabia produced 9.92 million b/d in March, according to the latest Platts OPEC survey, 138,000 b/d below its quota of 10.058 million b/d.
"I don't think Saudi Arabia will tap into all of its spare capacity, but depending on how many of Iran's usual customers it takes on, we could see Saudi Arabia pushing up against its allocation number," Wald said.
That would be welcome relief for consuming countries, not least the US, a key Saudi ally.
--Herman Wang, firstname.lastname@example.org
--Edited by Valarie Jackson, email@example.com