THE chatter is on. Saudi Arabia, for obvious reasons, would be happy to see crude prices rise to $80 or even $100, Reuters quoted three industry sources as saying. This means, despite the glut being over, Riyadh is seeking continuation of the output cut arrangement between Opec and non-Opec oil giant Russia.

With inventories back to average levels and expected to fall further, limits on output would surely push the market into a deficit. The over-tightening, presumably, would lead to higher oil prices…just in time for the Aramco IPO, Nick Cunningham wrote in his piece.

Sources told Reuters that behind closed doors Saudi officials have considered $80 per barrel, or even $100 per barrel, as sort of unofficial price targets.

“We have come full circle,” another high-level industry source told Reuters. “I would not be surprised if Saudi Arabia wanted oil at $100 until this IPO is out of the way.”

And to this end, Saudi Arabia continues to work towards tightening of the market. Bloomberg reported that in March, the compliance rate with the output cut arrangement surged to 164 per cent, a new high, up from 148pc in February. In order to achieve that, Saudi Arabia had to cut its output further in the month. Riyadh seems determined to that end.

Despite all the rhetoric to reduce oil dependence, Saudi addiction to all is not coming to close. Riyadh is faced with large fiscal deficits, which, if left unaddressed, presents a long-term threat. Saudi foreign cash reserves are down to $488 billion, down a third from their peak in August 2014 at $737bn.

“Their (budgetary) breakeven is around $85 per barrel,” estimates Francisco Blanch, global head of commodities research at Bank of America Merrill Lynch, citing the reason why they might continue to favour higher prices.

“Saudi Arabia wants higher oil prices and yes, probably for the IPO, but it isn’t just that,” the Organisation of the Petroleum Exporting Countries (Opec) source told Reuters.

They have signed hundreds of billions of dollars’ worth of agreements with major Western countries. And the shopping list doesn’t end there. “Look at the economic reforms and projects they want to do, and the war in Yemen. The question remains, how are they going to pay for all that? They need higher prices,” the Reuters source said.

It now seems that the mere talk of $100 a barrel is contributing to the price momentum. But other factors are also chipping in. Prices were also supported by the fall in US oil stockpiles across the board last week, with gasoline and distillates drawing down more than expected on stronger demand, according to data from the U.S. Energy Information Administration. U.S. Crude inventories dropped by 1.1 million barrels as a result of a decline of 1.3m barrels per day in net crude imports.

Geopolitical risks also seemingly rising. That is also contributing to the recent firming up of the crude markets.

Dutch bank ING said in a note to clients that Brent had risen back above $70 in April “due to geopolitical risks along with some fundamentally bullish developments in the market”.

If President Donald Trump would sign the Iran waiver on May 12 continues to haunt the oil markets. It’s too close a call. Most oil investors do not seem ready to take a chance that Iran’s nuclear deal with Western powers will remain intact next month.

Over the last couple of weeks, a number of investment banks including Julius Baer, BNP Paribas and Barclays have raised their price forecasts and cited Iran as a key reason. Goldman Sachs said the potential partial loss of Iranian output could add $7 to the price.

Venezuela is also a risk for the market, and its oil output has been declining, rather involuntarily. There is a possibility that the U.S. could take sanctions against Venezuela if President Nicolas Maduro proceeds with an election in May. Venezuela currently produces about 1.5m barrels a day, down 180,000 barrels from January levels and 540,000 from the year earlier.

The spiralling oil prices may be putting up a rosy picture before the producers, yet in the mid-long term, disaster cannot be ruled out. A phase of high market prices has always been followed by a slump in the global oil demand and hence the market prices.

And despite all the claims of diversifying away from oil, the fact remains, oil producers continue to depend on oil for revenues. In case that happens, new Opec leaders may not be able to politically sustain an era of low oil prices. That could cost some their rising political fortunes.

Published in Dawn, April 22nd, 2018