Saudi OP Strategy Success

Saudi Claims Oil Price Strategy Success

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Anjli Raval in Riyadh                                                    Last updated: May 13, 2015 6:56 pm

Saudi Arabia says its strategy of squeezing high-cost rivals such as US shale producers is succeeding, as the world’s largest crude exporter seeks to reassert itself as the dominant force in the global oil market.

The kingdom’s production rose to a record high of 10.3m barrels a day in April and there is no sign that it plans to reverse its policy at next month’s meeting of Opec, the producers’ cartel, in Vienna.

“There is no doubt about it, the price fall of the last several months has deterred investors away from expensive oil including US shale, deep offshore and heavy oils,” a Saudi official told the Financial Times in Riyadh, giving a rare insight into the kingdom’s thinking on oil strategy.

The International Energy Agency, the world’s leading energy forecaster, on Wednesday released data backing up the Saudi position. The agency said that with the number of rigs running in the US plunging by 60 per cent in response to lower oil prices, US shale oil production had “buckled” in April, “bringing a multiyear winning streak to an apparent close”.

But the IEA also cautioned that it would be “premature” to suggest that Opec had “won the battle for market share”. It said global crude supply was growing, even from high-cost areas such as Brazil, as well as from other Opec member states such as Iran and Iraq.

However, the Saudi official said he expected the kingdom to maintain its dominance of global energy, despite the growth of alternatives to fossil fuels and competition from rival oil producers within Opec and beyond. “Saudi Arabia wants to extend the age of oil,” he said. “We want oil to continue to be used as a major source of energy and we want to be the major producer of that energy.”

The official was speaking nearly six months after Opec, which is led by Saudi Arabia, took its landmark decision to keep output steady in the face of rising supply from rivals, rather than play its traditional role of cutting production to support prices.

The decision triggered a fresh fall in the oil price, throwing the budgets of the poorest exporter countries into disarray and forcing international energy companies to slash spending, drilling and jobs.

Saudi officials later explained that the policy was designed to put pressure on producers that require a higher oil price to be economic such as US shale drillers and companies operating in Brazil’s offshore fields. These they believed would be the first to collapse in a survival of the fittest as prices plunged.

Expectations are already rising that the market could soon start to tighten by midyear. The IEA said on Wednesday that was one of the reasons for the recent rally in the oil price: having crashed from $115 a barrel last June to almost $45 in January, Brent, the international crude benchmark, is now back up at around $68.

The Saudi official said the price of oil had now “reached a bottom” and it “doesn’t look like it is going back”.

But experts say it is too soon to say whether Saudi Arabia is succeeding in increasing its market share. Data from 2011-14 show that while its share of imports to India and Japan has grown, in China it has lost out to Opec peers Iran and Iraq.

US shale producers would also disagree that Saudi Arabia has succeeded in squeezing them. The US oil industry has slowed down: but EOG Resources, the country’s largest shale oil producer, has forecast a return to “double-digit” production growth if the US benchmark, West Texas Intermediate, rises to $65 per barrel or higher. It is currently trading at around $61.

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The Saudi official admitted “increased efficiencies” were likely as US shale and other producers adjusted to lower prices. He also said the impact of the price rebound was still “unknown” and “there is not yet any clarity on the US supply curve and drivers”.

The comments from Riyadh come with the Saudi oil sector facing deep uncertainty in the wake of sweeping changes to the governance of the oil ministry and the state energy company Saudi Aramco by King Salman, who ascended to the throne in January.

Some oil sector observers in Saudi Arabia say that King Salman’s accession increased pressure on veteran oil minister Ali Al Naimi and the advocates of his oil production strategy to reaffirm their position.

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