Defying Trump, Saudi Arabia chooses 'Saudi first' oil policy at OPEC meeting

Key Points
  • Saudi Arabia has persuaded two dozen oil producers to cut output and will sharply throttle back its own production over the next two months.
  • President Donald Trump had urged the Saudis to keep pumping at high volumes in order to cut fuel prices.
  • Saudi Arabia took a "Saudi first" stance by taking action to end an oil price slump and protect its own interests.
Saudi Arabia's Oil Minister Khalid al-Falih listens during a news conference after an OPEC meeting in Vienna, Austria, November 30, 2017.
Heinz-Peter Bader | Reuters

President Donald Trump has told foreign leaders that "America First" means he will always put the needs of America ahead of the needs of other nations — and that they should do the same for their own country.

Saudi Arabia's leadership appears to be on board with that message.

Last week, Saudi Arabia disregarded Trump's public pressure campaign to keep pumping at full throttle and cut fuel costs. The kingdom instead persuaded two dozen oil producers to cut output and announced a steep drop in Saudi production over the next two months.

"Saudi Arabia today had a 'Saudi first' policy," Helima Croft, global head of commodity strategy at RBC Capital Markets, said on Friday. Hours earlier, OPEC, Russia and several other producers agreed to take 1.2 million barrels per day off the market beginning in January.

US, Saudi Arabia, Russia key players in this oil market: Croft
US, Saudi Arabia, Russia key players in this oil market: Croft

The decision marks a reversal in Saudi energy policy. Over the last six months, the Saudis ramped up production by more than 1 million bpd — a move cheered by Trump. Now, the kingdom will endeavor to cut about 900,000 bpd in just two months.

On the surface, the decision looks like a stinging and risky insult to a critical ally. It comes as U.S. lawmakers are threatening to punish the kingdom after Saudi agents killed U.S. resident and Washington Post columnist Jamal Khashoggi in Istanbul in October.

But with oil prices mired in a bear market, few commodity analysts doubted Saudi Arabia would cut production. The kingdom needs Brent crude to rise about $25 a barrel just to balance its budget, according to the International Monetary Fund.

It was also clear that Saudi Arabia, which produces twice as much oil as the next-biggest OPEC producer, would have to contribute the largest cuts. The Saudis produced below their quota when OPEC reached a deal with Russia and other producers to cut output beginning in 2017, and the kingdom's production hikes have dwarfed increases from other producers since the alliance agreed to raise output in June.

Meanwhile, many other OPEC members are producing at or below the levels they agreed to in 2016.

"The Saudis will always do the lion's share. But for them, it's important optically and to some degree in a real world sense that Russia and several other OPEC countries go along," said Bob McNally, founder and president of Rapidan Energy Group.

What remained uncertain heading into last week's meeting was how transparent the Saudis would be. OPEC had reportedly considered a convoluted plan that would have removed barrels from the market but masked the size of the cuts to avoid angering Trump.

But on Friday, Saudi Energy Minister Khalid al-Falih sent a message that was clearer than some analysts expected.

In November, Saudi Arabia pumped a record 11.1 million bpd, Falih disclosed. This month, Falih anticipates output will fall to about 10.7 million bpd. In January, the Saudis plan to produce 10.2 million bpd.

"This is partly driven by our commitment to start on the right foot in 2019 and to demonstrate that delivering on this agreement is not going to take a long, protracted period of gradually winding down," Falih said. "We say what we mean, and we deliver on what we say."

Officially, OPEC members will cut production from October levels, when the Saudis pumped about 10.6 million barrels a day. But the surge in Saudi production in November will make the drop look more eye-popping.

On Friday, Falih implicitly faulted the Trump administration for contributing to the price slump over the last two months.

He said customers loaded up on crude oil in the fall anticipating that the Trump administration would apply strict sanctions against Iran. However, Trump allowed some of Iran's biggest customers to keep importing its oil, so supplies didn't tighten as much as feared. Now, customers will likely work through inventories before buying more oil, according to Falih.

"Let's be frank, I think some of last three months' demand has been on the back of expectations of strict applications of sanctions on Iran, which have been relaxed," Falih said.

It is widely known that the Trump administration lobbied Saudi Arabia to raise production earlier this year as the Treasury Department prepared to restore sanctions on Iran, a policy that has boosted prices. However, Trump still took a confrontational tone on Twitter throughout 2018, blaming OPEC for rising oil prices and ordering the group to cut production.

"In the past you had U.S. presidents quietly asking Saudi Arabia to keep the market balanced. Now you have the U.S. president publicly tweeting against OPEC," Croft told CNBC's "Closing Bell." "I think everybody in OPEC is waiting to see what President Trump does next. Is he going to be quiet after this agreement, or is he going to take to social media and criticize OPEC?"

So far, Trump has held his fire, and the administration has continued to hold talks with the Saudis.

Prior to the OPEC meeting, State Department special envoy for Iran Brian Hook met with Falih in Vienna. On Monday, Falih's official Twitter account posted photos of the minister smiling next to U.S. Energy Secretary Rick Perry in Saudi Arabia and said the two had discussed oil market conditions.

@Khalid_AlFalih: Today in Dhahran, I was delighted to meet with my colleague, Secretary of Energy Rick Perry @SecretaryPerry, and discussed the conditions of the oil market, and the kingdom's constant keenness on the stability of the markets, as we addressed the Kingdom's efforts to develop technologies to reduce carbon emissions and energy efficiency and opportunities for technical cooperation between Two.

It is possible Trump will remain silent until oil prices start to bubble higher.

Some analysts believe Trump's reason for lambasting OPEC on Twitter is not necessarily aimed at getting the group to change its policy. Instead, they say, it's part of a plan to deflect blame when oil prices rise and take credit when they fall.