Stalling oil market puts onus back on Saudi Arabia

The stalling oil market has put the onus back on Saudi Arabia two weeks ahead of a planned informal meeting of Opec oil ministers in Algeria.

Two years into the kingdom’s laissez-faire policy, which has shown some signs of success, sombre forecasts in the past week from Opec and the International Energy Agency predicting a prolonged oil glut has put renewed pressure on Saudi Arabia and its Arabian Gulf allies to reconsider their position.

Oil prices dropped by about 7 per cent in the past week, from a close of about US$50 per barrel on September 8 to about $46.40 late yesterday after the gloomy reports.

The big concern voiced by Opec in its monthly assessment was that supply outside its membership was on the rise again, pointing particularly to the prospect of the long-delayed Kashagan project in Kazakhstan – “the world’s costliest oilfield”, as it is often described – which Opec estimated might add as much as 360,000 barrels per day to world output next year.

The IEA followed with a prediction of slowing demand growth, particularly in China and India, and an echo of Opec’s concern that oversupply would continue well into next year.

Those reports were quickly followed by bearish comments from some analysts, particularly Jeffery Currie, the widely followed head of commodities at Goldman Sachs, one of the world’s largest commodities trading banks.

Mr Currie, who had said in March that $40 per barrel was probably a “self-defeating” price in that it would encourage higher-cost supply back on to the market, said on Tuesday that he expects oil to trade to be in the $45 to $50 range for the next 12 months.

Although predictions by banks or other institutions are rarely on the money, the souring mood will mean that Khalid Al Falih, the Saudi oil minister, will be under increased pressure in Algiers later this month to reach some kind of deal, even if there is little room for manoeuvre within the group.

“If a freeze deal is genuinely agreed upon, countries where output has fallen due to unplanned outages and sabotages – [Libya and Nigeria, for example] – may be given a ceiling of pre-disruption levels, [so that] the volume at which the so-called freeze is agreed upon could be even higher than current Opec production,” said Amrita Sen, the chief oil analyst at Energy Aspects.

This would probably be seen as bearish at first, but “this may be a baby step towards potentially more supportive developments down the line, even though plenty of uncertainties remain”, she said.

The dilemma for Saudi Arabia is that its policy has been working, albeit slowly.

Since prices collapsed from $115 per barrel in mid-2014 to below $30 in January, they have been fairly steady in the mid-$40s. Volatility has also halved since the start of the year, although it has been drifting higher in the past month.

The long game that Saudi Arabia’s oil leaders have been playing – with the full support of the UAE and Kuwait – is to keep backing their low-cost production and let higher cost output act as swing production.

The irony of the Kashagan project is that it is typical of the ­giant money-losing schemes that have been cancelled in the past year. At $50 billion, the project is five times over budget and even now the head of the operating company and Kazakhstan’s energy minister are at odds over its production schedule. The more optimistic outlook would have it starting next month and producing an average of 37,000 bpd in the fourth quarter.

Italy’s Eni, which is the lead foreign company on the project, has forecast output to reach 360,000 bpd by the middle of next year. Its previous attempt at ramping up in 2013 quickly came to a halt because of technical problems.

The IEA, in a separate report this week, pointed to the huge cuts in investment in oil projects as oil prices slumped.

The share of national oil companies in overall investment spending has grown to a record 44 per cent because of the investment slump in places like offshore Africa and the Americas, it said.

“After a cut of 19 per cent in 2015, [the big international oil companies] have announced a further reduction of aggregate upstream spending of 21 per cent in 2016,” the IEA noted.

“Only a few companies, especially in the Middle East, are maintaining upstream investment levels, while a smaller number, including Russia’s Rosneft and Algeria’s Sonatrach, intend to increase spending, albeit in local cur­rency terms.”

The Saudi long game is working. It is now a question of whether it decides to adjust short-term tactics.

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Anthony McAuley

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