Oman’s oil minister, Mohammad Al Rumhy, showed his frustration with Saudi Arabian-led Opec policy as he railed against the market volatility that has carried benchmark oil prices to six-year lows over the past few months.
“I fail to understand how market share can be more important than revenue,” Mr Al Rumhy said at an energy industry conference in Kuwait, Bloomberg News reported.
Although Oman is not a member of Opec, the minister was expressing the same frustration that some within the producers’ group, including his Iranian and Venezuelan counterparts, have shown with the policy determined by Saudi Arabia. The kingdom is Opec’s effective leader as the biggest producer and only member with significant spare capacity.
At the end of November, Saudi Arabia forced through a policy to hold Opec production levels steady at about 30 million barrels a day, even though it was clear by then that with softening demand in key markets, including China, and with production from the United States rising towards record levels, the market was being supplied with about 1 million bpd more than it needed.
Last week, the International Energy Agency, the Paris-based think tank for energy consuming countries, said the market oversupply was manifest in sharply rising oil inventories.
“Stocks soared counter-seasonally by 12.5 million barrels in December,” the IEA reported. Also, “interest in floating storage was reignited with reports of trading houses booking up to 30 million barrels of long-term floating storage capacity by mid-January.”
The Saudi strategy is aimed at forcing higher-cost producers, particularly the opportunistic entrepreneurs behind the US production surge, off the market. This would allow the Saudis and fellow Opec members to maintain market share and for demand to recover and push prices back up towards US$100 a barrel.
But Oman’s oil minister reckons the strategy is misguided. He said Opec’s policy would only temporarily force high-cost producers off the market so that the only result would be price volatility.
Despite the criticism, the Saudi approach has its defenders.
“We don’t know how the Saudis came to the conclusion they came to, but they must have had some pretty bright people advising them and decided to abandon the tactics of the previous few years,” said Ian Bourne, the chief analyst at Argus, an independent oil research company. “But overall its aim is the same: to ensure there is a long-term market for [Saudi] crude.”
The policy has, in fact, begun to bear fruit. The collapse in oil prices has led to a large number of companies announcing cutbacks in investment, including a sharp decline in the number of rigs in use in the United States, mostly by producers of shale oil.
The cutbacks will take time to filter through to supply.
In the US, for example, there are already clear signs of reduced well drilling, but existing production will continue for a time because many producers have locked in prices and can make money even at prices well below the current market.
“Even though US output may continue to increase in the near term, we would expect markets to begin pricing in falls in production a while before they occur,” said Tom Pugh of Capital Economics. “This supports our view that the price of Brent will rebound to $60 per barrel by the end of year.”
Another balancing factor is Chinese demand, which is as tricky to track as world oil supply.
A new analysis by the London-based research consultancy, Energy Aspects, forecasts that Chinese oil demand growth will continue to slow.
“As the government moves to rebalance the economy and implements an aggressive environmental agenda, oil consumption in China will become more efficient, leading to slower demand growth of around 200,000 to 300,000 bpd,” its report said. That compared with previous estimates exceeding 500,000 bpd.
This is tempered by a huge addition of crude oil storage capacity this year, which Argus puts at more than 100 million barrels.
The bottom line, as Ian Bourne said, is that “it looks like the pain for oil producers will probably last for at least the first half of the year”.
amcauley@thenational.ae
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