The weight of the global oil markets will fall on the backs of Saudi Arabia. This weekend will be one of the most critical weekends in the global oil market ever.
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Oil is on track for its worst month since the 2008 financial crisis meltdown as the world’s largest producers, the United States, Russia and Saudi Arabia, will talk at the Group of 20 (G-20) summit in Buenos Aires, Argentina, and set the course for the future of the global oil market. The official OPEC meeting Dec. 6 in Vienna will be only dessert, because all of the most important decisions on the oil market will be made at the G-20.
The oil market is screaming for a production cut, but OPEC and Russia must go quietly to avoid getting zapped with a presidential tweet and the vitriol of President Trump. The dynamics going into this meeting are really unlike anything we have seen before, and the oil producers of the world must determine whether this sell-off in oil is about oversupply or a warning sign that the globe is headed for some very tough times ahead.
In the meantime, if a cut in oil production is going to be agreed upon, the bulk of the cut will come from Saudi Arabia, which has backed itself into a political corner.
In the old days, when it came to an OPEC meeting it was always Saudi Arabia that had the swagger. They were for years the world’s top energy producer as well as the global oil swing producer. Their cost of production at one point was among the cheapest on the globe, so they “ruled the roost” and presidents and potentates would try to win favor from the oil production kingdom, but times have changed. Now the Saudis, among the biggest three oil producers, have arguably the highest breakeven points among the three producers to meet their budget needs.
The other oil producers in the cartel, who have been pushed around by Saudi Arabia in the past, now are starting to push back. It appears that most producers are taking advantage of the fact that Saudi Arabia is under pressure because of the murder of Jamal Ahmad Khashoggi, the dissident that many believe was ordered killed by Crown Prince Mohammed bin Salman. The market now believes that the Saudis are beholden to Trump, who stood by the Crown Prince in what seemed to be an exchange for more Saudi oil production.
That has taken away the Saudis’ power and influence. For the OPEC +1, Russia being the plus one, this has put Russia, not Saudi Arabia, as the new de facto leader of the global oil market conspirators. Even though Russia is not an official OPEC member, many in the cartel will look to Russia for leadership this weekend. Instead of embracing an oil production cut, the Russians have left the Saudis twisting in the wind, and just recently said that they had accepted the need to cut production together with OPEC, but also made it clear that they would not be cutting that much.
So, in other words, if there is to be a cut it will be Saudi Arabia that will have to bear the brunt of it, and if they want a cut, they may not have a choice.
Yet Russia has its geopolitical problems as well. World leaders will be under increasing pressure to sanction Russia over their undeclared war with Ukraine. The Russians opened fire, wounding at least three sailors and seized the Ukrainian flotilla over the weekend in what appears to be a blatant act of aggression. Ukrainian President Petro Poroshenko is calling on NATO to send more ships to the Sea of Azov for an ongoing confrontation with Russia and Trump canceled his meeting with Russian President Vladimir Putin.
So as the three biggest oil producers meet at the G-20, it will be interesting to see if they can find any common ground on price and production level. And even if they do, it may really come down to another meeting with Trump and President Xi from China. With oil demand worries because of weak economic data making the rounds, the framework for a trade deal would instantly increase demand expectations and send oil soaring.
No deal would sow doubts and the oil slide would probably continue. If there is no trade deal with China, a cut would be a moot point, and perhaps OPEC won’t be able to cut production enough to raise prices.
Phil Flynn is senior market analyst with The PRICE Futures Group, the author of “The Energy Report” and a contributor to the FOX Business Network.