Saudis Believe They Are Winning The Oil Price War
It’s almost a foregone conclusion that OPEC won’t cut its production levels at its June 5 meeting in Vienna. Anyone needing strong evidence, if not proof, of this need only listen to Ali al-Naimi, the architect of the cartel’s effort to reclaim market share.
In fact, some observers say OPEC not only won’t cut overall production levels from 30 million barrels a day to shore up prices, but may even increase them.
It’s important to remember that shoring up oil prices is not the highest priority on al-Naimi’s list right now. While some OPEC members may have trouble making ends meet, wealthier Gulf Arab states can withstand lower revenues. This is especially true for Saudi Arabia, which has currency reserves of nearly $750 billion.
Instead, the strategy was a price war against non-OPEC members who were ramping up production, particularly those in the United States exploiting the boom in shale oil. The question, posed to the Saudi minister when he arrived June 1 in Vienna in advance of the cartel’s meeting, was whether that strategy was working.
“The answer is yes,” al-Naimi replied. “Demand is picking up, supply is slowing.”
This isn’t just wishful thinking. OPEC is, in fact, gradually reclaiming its market share, according to a June 2 report from Barclays. It said that the cartel captured an average market share of 33 percent in April, up by 1 percentage point from the same month last year, but still 35 percent below the share it controlled in the middle of 2012. Part of this recent growth is attributable to increased sales to China.
The comment by the Saudi oil minister can only be interpreted as a sign that a production cut isn’t going to happen, according to Gareth Lewis-Davies, an energy strategist at the Paris-based financial services company BNP Paribas.
“[Al-Naimi] said that Saudi strategy is working, which suggests that they therefore would like to continue with that policy,” Lewis-Davies told Bloomberg on June 2. “They’re playing a longer game that requires prices to remain at or around current levels for longer.”
The reason is that many oil companies, particularly those who extract oil from shale, have higher production costs, primarily because of complex and expensive fracking, and a long stretch of lower fuel prices could cut deeply into their profits.