15 October 2014, Abuja – Saudi Arabia is quietly telling oil market participants that Riyadh is comfortable with markedly lower oil prices for an extended period, a sharp shift in policy that may be aimed at slowing the expansion of rival producers including those in the US shale patch, Reuters reported Tuesday.
November orders for Brent light crude fell again yesterday to $85 per barrel while WTI slumped to $81 a barrel, spreading anxiety among price-sensitive oil producers like Nigeria and Venezuela that derive most of their foreign exchange earnings from crude oil exports.
Some Organisation of the Petroleum Exporting Countries (OPEC) members including Venezuela are clamouring for urgent production cuts to push global oil prices back up above $100 a barrel. But Saudi officials have telegraphed a different message in private meetings with oil market investors and analysts recently.
The kingdom, OPEC’s largest producer, is ready to accept oil prices below $90 per barrel, and perhaps down to $80, for as long as a year or two, according to people who have been briefed on the recent conversations.
The discussions, some of which took place in New York over the past week, offer the clearest sign yet that the kingdom is setting aside its longstanding de facto strategy of holding prices at around $100 a barrel for Brent crude in favour of retaining market share in years to come.
The Saudis now appear to be betting that a period of lower prices – which could strain the finances of some members of the OPEC – will be necessary to pave the way for higher revenue in the medium term, by curbing new investment and further increases in supply from places like the US shale patch or ultra-deepwater, according to the sources, who declined to be identified due to the private nature of the discussions.
The conversations with Saudi officials did not offer any specific guidance on whether – or by how much – the kingdom might agree to cut output, a move many analysts are expecting in order to shore up a global market that is producing substantially more crude than it can consume. Saudi pumps around a third of OPEC’s oil, or some 9.7 million barrels a day.
Asked about coming Saudi output curbs, one Saudi official responded “What cuts?” according to one of the sources.
Also uncertain is whether the Saudi briefings to oil market observers represent a new tack it is committed to, or a talking point meant to cajole other OPEC members to join Riyadh in eventually tightening the taps on supply.
One source not directly involved in the discussions said the kingdom does not necessarily want prices to slide further, but is unwilling to shoulder production cuts unilaterally and is prepared to tolerate lower prices until others in OPEC commit to action.
With most other members of the cartel unable or unwilling to reduce their own output, the group’s next meeting on November 27 is set to be its most difficult in years.
OPEC has agreed to cut production only a handful of times in the past decade, most recently in the aftermath of the 2008 financial crisis.
On Friday, Venezuela – one of the cartel’s most price-sensitive members – became the first to call openly for emergency action even earlier. Foreign Minister Rafael Ramirez said: “It doesn’t suit anyone to have a price war, for the price to fall below $100 a barrel.”
On Sunday, Ali al-Omair, oil minister of Saudi Arabia’s core Gulf ally Kuwait, appeared to be the first to articulate the emerging view of OPEC’s most influential member, saying output cuts would do little to prop up prices in the face of rising production from Russia and the United States.
“I don’t think today there is a chance that (OPEC) countries would reduce their production,” state news agency KUNA quoted him as saying.
Omair said that prices should stop falling at around $76 to $77 a barrel, citing production costs in places like the United States, where a shale oil boom has unexpectedly reversed dwindling output and pushed production to its highest level since the 1980s.
Saudi oil officials have made no public comments on the deepening swoon in markets. Senior officials did not reply to questions from Reuters about recent briefings.
– This Day