Thursday, 23rd April 2015

Saudis look set to dig in on oil prices

Some firming of oil prices was to be expected, given the Saudi-led coalition’s assault on Yemen and surging violence in Iraq and Libya – especially as markets are not projecting a major surge in short- or even medium-term Iranian output following the framework nuclear deal signed in Lausanne on 2 April. But market fundamentals suggest the oil price will remain soft into H2 2015, with little sign of a major shift in Saudi thinking ahead of the scheduled 5 June Organisation of the Petroleum Exporting Countries (Opec) ministerial meeting in Vienna.

The key player, Saudi petroleum and mineral resources minister Ali Bin Ibrahim Al-Naimi, has been making conciliatory noises towards Opec, telling the Saudi Economics Association on 7 April that the kingdom’s “first and most important co-operative relationship is with Opec… the world’s most important and most active international petroleum organisation”. Talk of growing weakness and divisions within Opec was “politicised and untrue”, he said. “There may be differences of opinion between member states, but this is quite natural. This has always been Opec’s reality since it assumed its leadership position in the market in the early 1970s.”

Opec’s 5 June meeting is intended to review output policy for H2 2015. It will provide another opportunity for members under most pressure from the oil price slump – notably Algeria, Iran, Nigeria and Venezuela – to argue for a policy that looks beyond ‘market share’ to strengthen prices. Following the defeat at the ballot box of Nigeria’s incumbent President Goodluck Jonathan, Opec will also need to select a new president, to replace petroleum minister Diezani Alison-Madueke, a close ally of Jonathan’s who is seen domestically as having set back the sector, and will be little missed (see GSN’s sister publication African Energy, 298/1).

Yet despite sometimes intense lobbying from Algeria and others, Saudi Arabia seems quite happy with the prevailing market and determined to stick to its guns. Saudi officials have said again and again that they will not repeat their policies of the first half of the 1980s, when the kingdom cut production several times in the hope of defending prices (from around 10m b/d in 1980 to around 3m b/d in 1985), but ended up losing both customers and price as other producers failed to follow suit and oil fell to less than $10/bbl. “We are not willing to make the same mistake again,” Naimi said. 
According to Naimi, oil prices are expected to improve in the near future. Saudi Aramco will continue to produce around 9.5m-10m b/d of crude – below Naimi’s claim of 10.3m b/d in March. Meanwhile, Naimi observed that Aramco had increased recoverable reserves of crude (to 267bn bbls) and natural gas (to around 300tcf) through reserve replacement and the application of technology. This oil and gas will be needed to fuel the kingdom’s industrial growth, he said. (Indeed, one expert who has been working with the ministry told GSN that Aramco needed to pump over 10m b/d just to produce the associated gas essential to fire Saudi power stations – a reflection of its failure to develop a major natural gas field in the Rub Al-Khali or elsewhere in the last decade.)

Despite Naimi’s bullish outlook (as viewed from Saudi Arabia), US output is holding up. In Washington on 7 April, the Energy Information Administration issued a brief showing the United States had stayed ahead of Russia and Saudi Arabia in 2014 to remain the world’s largest petroleum and natural gas hydrocarbons producer. “For the United States and Russia, total petroleum and natural gas hydrocarbon production, in energy content terms, is almost evenly split between petroleum and natural gas,” it said. “Saudi Arabia’s production, on the other hand, heavily favours petroleum.”

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