Saudi — it’s a strategy not a tactic

Wishful thinking? Living in the past? Whatever the reason, anyone who thought that Opec’s Saudi-led decision last November to let the crude flow in order to secure market share was a short-run tactical move, rather than a strategic repositioning, just wasn’t listening.

As Ben Winkley blogged yesterday, a flurry of notes from the big banks this week pointed out that $10/bl on the oil price in April doesn’t constitute a stable price recovery any more than a few swallows make a summer. The surprise is that they had to say it.

The numbers in this month’s Opec report and IEA report make the same point. Global oil demand forecasts for 2015 have been raised but only trivially. The brakes have been applied to US unconventional output growth, but they haven’t been slammed on, and other non-Opec growth is strong. US offshore production is rising. The IEA says Russian producers are “coping exceptionally well… thanks to a flexible tax regime”, while output from Brazil, China, Vietnam and Malaysia is growing “at a healthy clip”. The speed of response of US unconventional production to price signals is untested, but the message from producers seems to be that they are ready, even expecting, to bounce back in a few months’ time.

There may be voices in Vienna arguing that Opec has made its mark over the past six months and now is the time to prioritise price over production, even if it is just a move to underpin $60-70/bl. But those voices will not prevail at the organisation’s meeting in Vienna on 5 June. Indeed, traditional price hawk Iran is now only going through the motions when it calls for a 5pc cut in the now entirely notional 30mn b/d ceiling. With the tantalising prospect of an end to sanctions, Tehran is openly prioritising regaining market share and, obliquely, acknowledging that the Saudi-led strategy of putting the squeeze on non-Opec producers may be beginning to work.

The stated condition under which the Saudis have said they would stand for an Opec production cut is agreed parallel cuts by non-Opec producers such as Russia and Mexico. That isn’t going to happen and was never going to happen. The suggestion that it might was always a rhetorical device.

If the less wealthy Opec members — regarded as feckless by Riyadh — are lucky, the post-meeting statement will make a formulaic call to abide by the 30mn b/d ceiling.

Writing in the Aramco annual review, in his capacity as chairman of the board, Saudi oil minister Ali Naimi said, “When prices began to fluctuate during the fourth quarter, the kingdom’s financial strength, world-leading oil production capacity, and patient, long-term outlook gave confidence to both consumers and producers of energy.” That might have had them spitting feathers in Algiers and Abuja but it reiterated the point that Naimi and his colleagues have made time and again. They will sit this out.

Look back at his interview with Argus in December. The salient points as we approach the June Opec meeting are these:

  • It was never just a question of squeezing US unconventional production. He explicitly contrasts Mideast Gulf production costs with those of Russia, Brazil and west Africa
  • Is there a timeframe for the market share strategy working, or a price that cannot be borne? No. “Will this be in six months, one year, two years, three years? God knows.” And, “Whether the price goes down to $20/bl, $40/bl, $50/bl, $60/bl, it is irrelevant.”
  • Can the budgets of Arab Mideast Gulf states take two or three years of lower prices? “Yes, I can assure you they can withstand them” — an argument thus far supported by independent economists.

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