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 Some OPEC members including Venezuela are clamoring for urgent
production cuts to push global oil prices back up above $100 a
barrel. But Saudi officials have telegraphed a different message in
private meetings with oil market investors and analysts recently:
the kingdom, OPEC’s largest producer, is ready to accept oil prices
below $90 per barrel, and perhaps down to $80, for as long as a year
or two, according to people who have been briefed on the recent
conversations.
The discussions, some of which took place in New York over the past
week, offer the clearest sign yet that the kingdom is setting aside
its longstanding de facto strategy of holding prices at around $100
a barrel for Brent crude in favor of retaining market share in years
to come.
The Saudis now appear to be betting that a period of lower prices –
which could strain the finances of some members of the Organization
of the Petroleum Exporting Countries – will be necessary to pave the
way for higher revenue in the medium term, by curbing new investment
and further increases in supply from places like the U.S. shale
patch or ultra-deepwater, according to the sources, who declined to
be identified due to the private nature of the discussions.
The conversations with Saudi officials did not offer any specific
guidance on whether - or by how much - the kingdom might agree to
cut output, a move many analysts are expecting in order to shore up
a global market that is producing substantially more crude than it
can consume. Saudi pumps around a third of OPEC’s oil, or some 9.7
million barrels a day.
Asked about coming Saudi output curbs, one Saudi official responded
"What cuts?", according to one of the sources.
Also uncertain is whether the Saudi briefings to oil market
observers represent a new tack it is committed to, or a talking
point meant to cajole other OPEC members to join Riyadh in
eventually tightening the taps on supply.
One source not directly involved in the discussions said the kingdom
does not necessarily want prices to slide further, but is unwilling
to shoulder production cuts unilaterally and is prepared to tolerate
lower prices until others in OPEC commit to action.
OPEC ANGST
With most other members of the cartel unable or unwilling to reduce
their own output, the group's next meeting on Nov. 27 is set to be
its most difficult in years. OPEC has agreed to cut production only
a handful of times in the past decade, most recently in the
aftermath of the 2008 financial crisis.
On Friday, Venezuela - one of the cartel's most price-sensitive
members - became the first to call openly for emergency action even
earlier. Foreign Minister Rafael Ramirez said "it doesn't suit
anyone to have a price war, for the price to fall below $100 a
barrel."
On Sunday, Ali al-Omair, oil minister of Saudi Arabia's core Gulf
ally Kuwait, appeared to be the first to articulate the emerging
view of OPEC's most influential member, saying output cuts would do
little to prop up prices in the face of rising production from
Russia and the United States.
"I don't think today there is a chance that (OPEC) countries would
reduce their production," state news agency KUNA quoted him as
saying.
Omair said that prices should stop falling at around $76 to $77 a
barrel, citing production costs in places like the United States,
where a shale oil boom has unexpectedly reversed dwindling output
and pushed production to its highest level since the 1980s.
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Saudi oil officials have made no public comments on the deepening
swoon in markets. Senior officials did not reply to questions from
Reuters about recent briefings.
DON'T BE SURPRISED BELOW $90
Global benchmark Brent crude oil futures have fallen steadily for
almost four months, dropping 23 percent from a June high of over
$115 a barrel as fears of a Mideast supply disruption ebbed, U.S.
shale production boomed and demand from Europe and China showed
signs of flagging. [O/R]
Until recently, Gulf OPEC members have been saying that the price
dip was a temporary phenomenon, betting on seasonal demand in winter
to prop up prices. But a growing number of oil analysts now see the
latest slide as something more than a seasonal downswing; some say
it is the start of a pivotal shift to a prolonged period of relative
abundance.
Rather than fight the decline in prices and cede market share in the
face of growing competition, Saudi Arabia appears to be preparing
traders for a sea change in prices.
The Saudis want the world to know that “nobody should be surprised”
with oil under $90 a barrel, according to one of the people. Another
source suggested that $80 a barrel may now be an acceptable floor
for the kingdom, although several other analysts said that figure
seemed too low. Brent has averaged around $103 since 2010, trading
mostly between $100 and $120.
While the latest discussions are the bluntest efforts yet to signal
the shift in Saudi strategy, early signs had already begun sending
shivers through the oil market. In early October the kingdom cut its
official selling prices more sharply than expected in a bid to
maintain customers in Asia, widely seen as the opening shots in a
price war for Asian customers.
“Riyadh's political floor on oil prices is weakening," Robert
McNally, a White House adviser to former President George W. Bush
and president of the Rapidan Group energy consultancy, wrote in a
note to clients following a trip to Saudi last month.
McNally said he is not aware of any specific Saudi price or timing
strategy, but told Reuters that Saudi Arabia "will accept a price
decline necessary to sweat whatever supply cuts are needed to
balance the market out of the U.S. shale oil sector.”
As that message began to dawn last week, the price rout quickened,
with Brent lurching to its lowest level since 2010.
“Until about three days ago the absolute and total consensus in the
market was the Saudis would cut," said McNally. That is no longer a
foregone conclusion, he said. "The market suddenly realizes it is
operating without a net."
(Additional reporting by Rania el Gamal in Dubai and Timothy Gardner
in Washington; editing by Jonathan Leff and Matthew Lewis)
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