As Riyadh sizzles in 45C heat this week, Khalid al-Falih is likely to be cranking up his airconditioning. Like most other Saudis, the kingdom’s new oil minister will be struggling to remain cool — and it’s not just the blistering heat that is proving uncomfortable.
Deep inside the oil ministry there are anxious faces. Two years into a Saudi-initiated price crash that has smashed the budgets of many OPEC members and brought some, such as Venezuela, to their knees, there is little end in sight to the downturn.
True, oil prices staged a sharp rally between February and June when they nearly doubled to more than dollars 50. Since then, prices have sagged again, sliding towards dollars 40, amid continuing evidence of a glut of surplus crude building up in brimming storage tanks. Mr al-Falih, the world’s most influential oil man, is no shrinking violet. He has spent decades running Saudi Aramco, the state oil producer that operates Ghawar, the planet’s biggest oilfield.
Nevertheless, it was obvious that he was rattled last week when he announced that OPEC oil ministers would hold an informal meeting in Algeria next month to discuss possible action to stabilise prices.
This triggered an immediate rally, but oil bulls hoping for OPEC action in Algiers are betting on a shimmering desert mirage.
Joint action is almost impossible to imagine while OPEC remains riven by a ferocious rivalry between Saudi Arabia and Iran to win market share in Asia’s growing oil market.
Saudi production varies seasonally because of fluctuations in domestic energy demand in the summer — largely from airconditioning.
Saudi Arabia informed OPEC last week that it had pumped 10.67 million barrels of oil per day (bpd) in July — a record monthly figure beating the 10.56 million bpd set in June last year.
Iran is also boosting exports, eager to take advantage of the removal of international sanctions.
Tehran has upped output to 3.85 million bpd and plans to be at 4.6 million bpd within five years. That battle is being intensified by Russia, which is not a member of OPEC, which is also pumping more crude than at any other time since the collapse of the Soviet Union. Iraq, too, is lifting exports because it needs cash to fund a war with Isis.
All of this helps to explain why, despite low prices, global production rose by nearly 0.8 million bpd in July from the previous month, to 97.01 million bpd, while commercial stocks swelled by 5.7 million barrels to 3.09 billion barrels in June, according to AB Bernstein.
This four-way fight for market-share between some of the top exporters is more than offsetting the reduced output from OPEC members such as Venezuela and Nigeria, where production has been hit by a string of attacks by militants.
Perhaps more worrying for Mr al-Falih is rising evidence that US output is more resilient than expected. Since Saudi Arabia led OPEC’s decision in November 2014 to maintain output and defend market share against higher-cost US shale producers, oil prices have fallen.
For a time, the Saudi strategy succeeded in curbing US output. After peaking at 9.7 million bpd in April 2015, the highest monthly level since 1971, US oil production fell back to 8.9 million bpd in May this year. It appears to have stabilised and the US raised its output forecasts for next year to 8.3 million bpd from 8.2 million bpd.
As an executive at a top US oil services company told me last week, Saudi Arabia’s oil price gambit may end up having a perverse effect. Far from destroying America’s shale industry — as intended — it is instead making it stronger than ever by forcing producers to eke out ever greater cost savings, letting them stay competitive at far lower prices.
Quite where this will all end is hard to say, but a sustained recovery in oil prices looks a long way off and optimism about a snap higher to dollars 60 or dollars 70 looks increasingly naive.
Either way, it’s likely to be a long and difficult summer for Mr al-Falih.
By Robin Pagnamenta
Source: The Australian
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