Saudis stop swinging

Saudi Arabia has long been the swing producer within the Organization of the Petroleum Exporting Countries cartel. When crude oil prices have been too low, the Saudis have cut more than their fair share to help increase prices. When oil prices have been too high, Saudi Arabia has filled the gap to help bring prices down. But at OPEC’s most recent meeting on March 15, Saudi Arabia appears to have abdicated its role as swing producer, at least for this downturn.

Saudi oil minister Ali al-Naimi forced a rollover of the OPEC-11 (less Iraq) crude oil ceiling, despite premium oil prices in the mid-US$40s per barrel, and made future quota cuts contingent upon high compliance to the previous 4.2 million-barrels-per-day (bpd) of cuts. If crude oil prices are going to rise in the coming months, it will be up to the other members to cut production as well.

Following the December 2008 meeting in Oran, Algeria, at which the OPEC-11 production ceiling was slashed a record 2.5 million bpd to 24.85 million bpd, Geopolitics Central predicted near-perfect quota compliance by the beginning of March. It’s not that we didn’t expect some OPEC members would cheat; the usual suspects have always cheated in the past. Rather, we simply assumed that Saudi Arabia would cut substantially more than its share.

Besides Saudi Arabia, the swing producer, there tends to be two distinct groups within OPEC when it comes to quota compliance: members that seriously cheat on their production quotas and members that basically meet their quotas.

Financial Post