The comments from Al-Naimi come as the Organization of Petroleum Exporting Countries (OPEC) enacts record crude oil output cuts to counter sliding global energy demand in the midst of a severe economic slowdown. “Now that market sentiment has flipped, I expect continued volatility with exaggerated price weakness,” the Saudi minister said in a keynote address to the CERAWeek conference.
Oil’s roller coaster ride from nearly $ 150 a barrel last July to below $ 40 a barrel this week “represents a significant impediment to ensuring adequate and timely investment flows into the energy sector,” Al-Naimi said. “If today’s low prices continue long enough, they will sow the seeds for future price spikes and volatility.”
Saudi Arabia, a leading member of OPEC, has agreed to cut some 4.2 million barrels per day of production since September to combat the slump in prices. OPEC will meet again March 15 to review its output policy.
Al-Naimi painted a dire global economic picture as the worst economic downturn since World War II has shrunken global oil demand for the first time in 25 years. “Today, as we ponder the horrific consequences and the terrible swiftness and scope of the collapse, we know now that what we saw then was not unstoppable, but rather unsustainable,” Al-Naimi said.
“From a fundamental viewpoint, prices will be just as unsustainable at these low levels as they were at the stratospherically high levels experienced last year.”
The Saudi oil chief laid much of the blame for the price run-up on speculators, and pointed out that financial markets rushed to invest in oil as a hedge against a weakening US dollar.
The volatility of energy markets in recent years has often obscured market signals, leaving some unsure when to conserve energy, when to invest. Without price stability, Al-Naimi warned, “achieving global economic recovery will be significantly more difficult.”
Saudi Arabia has a goal of keeping spare production capacity at 1.5 million to 2 million barrels of oil per day to help stabilize prices, Al-Naimi said. That cushion is expected to swell to 4.5 million by mid-year when the 1.2 billion barrel-a-day project in Khurais comes online. The Saudi oil minister’s comments captured a common theme at the conference, that energy markets are in limbo.
“The unprecedented price volatility in conjunction with the complexity, breadth and the pace of the collapse of the financial system crashed over us like an economic tsunami, ripping us from our intellectual and experiential moorings, leaving many confused and uncertain about the way forward,” he said.
“The recent past was all about high risk and high returns. The present focus is on stability and survival.”
Al-Naimi did not give a specific price range where he thinks oil should be traded, but said crude prices have to achieve a balance-low enough to be accessible to lower-income developing countries that need it to gain economic ground while high enough to encourage conservation and spur development of unconventional resources.
“While there may be no consensus on what is a fair price for a barrel of oil, I think that we all can agree that the volatility of oil prices over the past year was detrimental to the interests of oil producers, consumers and the industry alike,” he said.
Al-Naimi predicted climate change and the geopolitics surrounding it would prove an even bigger driver of energy markets and policy than the economic crisis. He warned that a reactionary move toward protectionism and over-regulation could create a chilling effect on energy investment, but said governments pushing too hard for alternatives when it is still unknown which will be the most efficient and economic would have more dire effects.
“A nightmare scenario would be created if alternative energy supplies fail to meet overly optimistic expectations while traditional energy suppliers scale back investment due to expectations of declining demand for their products,” he said.
