Saudi Arabia has been sending aggressive signals that it will defend market share, even if that means a sustained period of lower oil prices, setting the scene for a showdown with other Opec members, many of which feel the economic pain at much higher prices than wealthier Gulf producers are able to weather.
The clearest signal from the Saudis came on Friday in the latest monthly oil market report from Opec, where the kingdom officially reported that it increased oil production by more than 100,000 barrels per day last month, even while oil prices were sliding sharply.
Saudi Arabia reported that it increased oil production to 9.7 million bpd from just under 9.6 million bpd in August, a move that came as a surprise to the market. Opec carries both officially reported numbers and an estimate from "secondary sources", which is made up of best guesses from a number of specialist news organisations.
The secondary sources typically report Saudi production higher than the official number, but for September their estimate was 100,000 bpd below the officially reported production number.
The move follows months of increasingly deep discounts for Saudi crude oil grades to Asian customers, price cuts that have had to be matched by other regional producers, including Kuwait, Iran and Iraq.
“Cutting their prices sends a strong message to people watching the market that the Saudis are going to defend market share,” says Alexander Schindelar, a Dubai-based oil market analyst at Energy Intelligence.
“They are not going to abandon their customers or let others take them in big markets like Asia. Instead of cutting production they’ve decided to stay competitive on price.”
This robust defence of market share comes as oil prices continue their long slide since the summer peak of US$115 a barrel for benchmark North Sea Brent crude, which was down another $1.67 a barrel late in afternoon trade UAE time yesterday at $88.57.
A number of factors are behind the weaker prices, including plentiful oil supply in the Atlantic Basin market, where growing production from the US has pushed oil – including West African, North Sea and Latin American crude – into other markets, including Asia.
But the latest impetus for the markets is the slowing global economy, which the IMF last week predicted would grow by only 3.8 per cent next year as Europe, China, Russia and Brazil all grow more slowly than previously expected.
That has pushed prices below the psychologically important $90 per barrel level.
However, despite the 23 per cent fall in oil prices, they are still at levels that Saudi Arabia and most of the Gulf producers can live with in terms of their national budgets.
Because of rising state spending, the oil price which the Saudi government needs to balance its budget has risen to $89 a barrel last year from $78 in 2012, the IMF said.
The UAE’s budget break-even oil price is lower, around $84 last year.
However, the IMF has forecast that the Gulf countries would continue to benefit from relatively robust growth.
“The Gulf countries are quite well insulated,” said Jason Tuvey, Middle East economist for Capital Economics in London. “Over the past decade they have built up large buffers, in particular through their sovereign wealth funds, and can easily weather a period of low oil prices for several years.”Not all Opec countries are not in as good a shape as Saudi Arabia and, none more so than Venezuela. Despite its oil wealth, the country has struggled even in times of high oil prices to grow, posting GDP growth of just 1.3 per cent last year and forecast for a decline of 3 per cent this year.
“Another leg down in oil prices is particularly bad news for Venezuela,” Capital Economics wrote yesterday. “Lower prices could ultimately trigger a debt default next year, which would deepen the economy’s malaise.”
Opec ministers will not meet until their normal scheduled meeting at the end of next month. The Saudis and other Opec members also will want to see how the negotiations with Iran over its nuclear programme are progressing – they are due to be resolved by late November or a deal will have to be agreed to roll over the current partial lifting of sanctions, which has been in place since July. There is no contingency in the event a comprehensive deal is reached.
A long-time adviser to Saudi oil minister Ali Al Naimi, Ibrahim Al Muhanna, said at a meeting in Bahrain two weeks ago that $90 per barrel represented a floor below which some of the more expensive operators, such as US shale oil producers, would shut in output. Not everyone agrees with the price level – some of the US producers are thought to have anticipated lower oil prices and hedged. But Mr Al Muhanna’s comments underline that the Saudi position currently is to let the market find its floor even if that causes some pain.
amcauley@thenational.ae
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