Crude supply is finally showing signs of falling in the US, where stockpiling slowed for the first time in months as US refineries begin to eat into the excess. A sign of success, then, for Opec’s Saudi Arabia-led experiment of putting the squeeze on high-cost producers (otherwise known as the US shale industry).
But the US situation has helped underpin a more than 25pc increase in the price of Brent since 2015 lows in January, and this is causing a new problem for the Opec strategists.
Brent below $60/bl may stall activity in Texas and North Dakota, but US shale is in a state of a permanent revolution — technological leaps mean that this is unlikely to be the pinch price for ever. Indeed, the recent price rally could mean that US supply will not be curtailed any time soon. And while demand is showing signs of life — Argus Fundamentals data show OECD oil demand rising by over 1pc in the first quarter compared with the same period last year, reversing its 0.8pc decline in 2014 — this is not widely deemed to be sustainable yet. BofA Merrill Lynch questioned whether the fundamentals justify such a strong run-up in prices and came to a one-word conclusion: hardly.
Riyadh wants price stability, on its own terms. The policy train it has set in motion is hurting Saudi finances, but Riyadh sees some benefit in lower prices, expecting them to help boost economic growth and demand for crude in Saudi Arabia’s key markets, particularly China. Saudi oil minister Ali Naimi survived a major reshuffle last week, signalling that the country’s new king is relaxed about the strategy of abandoning its position as defender of prices and concentrating instead on maintaining its market share.
So Opec needs to keep pushing for the “fair price” hinted at but not specified by Naimi last month. The latest salvo has come in Opec’s monthly bulletin, which suggests a new front in the Saudi-led strategy. In a lengthy editorial, Opec rails against the pernicious influence of “speculative activity”, what Citi calls the “macro waves of liquidity… buoying prices”.
The language Opec uses — “playmakers”, “puppeteers” that work in “an all-familiar culture of greed and self-interest” — suggests that rising prices are irking Opec’s power brokers almost as much as, say, New York Times columnist Thomas Friedman. But a plea for regulators to take a “long, hard look at the activities of these moneymen” shows Opec’s ultimate impotence in the matter.
Instead, Opec will probably have to wait to see if the US shale industry hits repeat as the price rises. A return to flat-out pumping could result in another, potentially bigger stock overhang in the latter part of the year, and another price slump to deal with it.
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