Maintaining output despite dramatically low prices has resulted in bankruptcy of dozens of U.S. shale oil firms.
A recovery in the oil price to around $50 has eased pressure on OPEC to turn down the taps when it gathers in Vienna on Thursday for its first meeting with the powerful Saudi crown prince’s new oil minister.
“The general consensus is that there will be no agreement to establish quotas or lower production,” said James Williams at WTRG Economics. “The most restrictive outcome might be an agreement to a production ceiling.”
Historically the Organization of the Petroleum Exporting Countries, which pumps around a third of the world’s oil or some 30 million barrels every day, has responded to a fall in prices by cutting production. But in the current cycle, which saw prices collapse from over $100 in 2014 to close to $25 this January, producers led by kingpin Saudi Arabia have changed strategy, maintaining output even with lower prices.
The aim, experts say, was to keep hold of market share by seeking to put competitors that need a higher oil price than the Gulf states to make money—particularly U.S. shale oil producers—out of business. And even though it has taken a while, straining even Saudi Arabia’s public finances—to say nothing of struggling OPEC member Nigeria and on-the-brink Venezuela—Riyadh’s approach now looks to be bearing fruit, experts say.
Last week both main oil benchmarks, West Texas Intermediate and Brent crude, briefly touched the psychologically important level of $50 a barrel and remain close to that level despite slipping back slightly. Dozens of U.S. shale oil firms have gone bankrupt and non-OPEC production is on course to drop sharply this year. The International Energy Agency predicted on May 12 that global oversupply will “shrink dramatically.”
But this easing of pressure is just as well, because the bitter animosity between Saudi Arabia and Iran means that any agreement to cut OPEC output is highly unlikely.
Since Iran’s 2015 nuclear deal with major powers entered into force in January and sanctions were lifted, Tehran has aggressively ramped up output to levels close to pre-sanctions levels, and is unwilling to stop now. This was in evidence when Iran stayed away from a disastrous meeting in Doha on April 4 between OPEC and non-OPEC members including Russia that failed to agree a possible coordinated output freeze.
Saudi Arabia meanwhile—and in particular the powerful young Deputy Crown Prince Mohammed bin Salman who is seeking to revamp the country’s economy—is now thought to have gone off putting a cap on output.
After the Doha debacle, the 30-year-old prince replaced veteran oil minister Ali al-Naimi—for 20 years the key player in OPEC’s Vienna shindigs—with Khaled al-Falih, who is thought to be, if anything, less amenable to a cut. “I see nothing to indicate that [Saudi Arabia] is prepared to back off the war of attrition for market share,” said Helima Croft at RBC Capital Markets. “[The] all-powerful deputy crown prince seems especially focused on his sweeping economic reform effort and not particularly phased by the current price environment,” Croft said.
Prices could head south again. The recent rise, driven by production problems in Libya, Nigeria and Canada, could reverse, and the prospect of higher U.S. interest rates is adding to downwards pressure on the oil price. But even then, it is far from certain that the Saudis would change strategy—not least because a lower oil price will hurt Iran.