Saudi Arabia is totally not bluffing the oil market

Saudi Arabia is totally not bluffing the oil market

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We’ve already reached that stage in Saudi Arabia’s poker game with the oil market where it drops the stony face and simply declares, “I’m not bluffing.”

As Bloomberg News reported on Tuesday, OPEC’s Monthly Oil Market Report showed an odd discrepancy in Saudi Arabia’s production numbers for February. OPEC publishes two sets of such supply figures, official ones provided by members and estimates derived from secondary sources (a sure sign of rock-solid trust, that). While secondary sources had Saudi Arabian output falling by 68,000 barrels a day last month, the country claims it actually boosted it by 263,000 barrels a day.

Did Saudi Arabia’s Oil Output Go Up Or Down In February?

Yes

This is unusual, not only in terms of the size of the gap, but the fact that one measure rose while the other fell. Looking back through OPEC’s monthly reports to August 2014 — around when oil prices began their slide from triple digits — that misalignment has occurred in only 7 out of 31 months.

And in no other month was the discrepancy as big as February’s. This chart shows the absolute gap between the change in production, according to the two sets of figures:

It’s important to note Saudi Arabia’s own numbers took its output back above the psychological level of 10 million barrels a day. This adds to the sense that February’s weird discrepancy is a not-so-subtle signal that Saudi Arabia will not bear the burden of supply cuts disproportionately. Indeed, the country’s own energy minister told a conference audience in Houston last week that Saudi Arabia refused to be “used” by others.

Clearly, this is aimed at both oil producers within OPEC’s own ranks and elsewhere. Non-OPEC producers that also signed on to the agreement to cut, notably Russia, aren’t yet delivering the goods (or rather still delivering too many of them).

Yet Saudi Arabia likely hopes U.S. shale producers — which didn’t collapse as expected in the crash and got back to work unnervingly quickly after oil went back above $50 a barrel — are also listening. Indeed, as Bloomberg News reported, OPEC members met with shale producers in Houston last week for talks about the market. For OPEC, that’s a sign of desperation; for the latter, it’s something they should think twice about repeating if they value public support for their industry.

If anything, though, Saudi Arabia’s tactics serve to highlight how few cards it actually holds.

Saudi Arabia, the organization’s de-facto leader, has swung from an all-out war for market share back to a policy of managing production and now to a warning it won’t necessarily stay the course on that, all in the space of about two-and-a-half years. This is demonstrates just how much shale producers have disrupted the global oil market.

There is simply an inherent weakness in Saudi Arabia’s position. If it talks up prices — and cuts supply to back that up — then it risks both encouraging rival supplies and dampening demand. Production from shale basins, which can come online in a matter of months, has sped up this adjustment process.

But if Saudi Arabia instead tries to talk down the market — and raise production — then prices will fall. This would actually allow market forces to do their thing (something to watch out for in coming months). Yet the experience of the past couple of years suggests Saudi Arabia’s tolerance for this whole market-forces malarkey is more limited than its relatively high store of foreign-exchange reserves would suggest.

It is especially worrying for Saudi Arabia and other OPEC members that Tuesday’s report from the organization noted a recent recovery in output from Canadian oil sands, a relatively high-cost source of supply that should be suffering much more at today’s price levels. While headlines about the likes of Royal Dutch Shell Plc selling off most of its oil-sands assets suggest a terminal decline, don’t forget someone bought those assets — and I’m guessing they aren’t planning to shut them down.

As I wrote here, Saudi Arabia is in a race to restructure its economy in order to live with lower oil prices, just as oil companies the world over are restructuring their operations and adopting technologies in order to do the same. The former’s resort to jawboning tells you who ultimately has the harder task.

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