When Saudi Arabia argues next week that the Organization of the Petroleum Exporting Countries (Opec) should keep up production to fight the rise in US shale-oil levels, prices will be on its side.
Crude plunged for eight of nine weeks prior to the group’s November gathering, when the kingdom faced down opposition from the majority of fellow members, who advocated output reductions to tackle a global glut. With oil companies around the world cutting investment, US output peaking and prices up, Saudi Arabia’s strategy will be extended at Opec’s semiannual meeting on June 5, Société Générale SA and Bank of America Corp. said.
Oil prices have recovered more than 40 percent from a six-year low in January, as US production eases from the highest in more than four decades. The rebound will help vindicate the approach taken by Saudi Arabia as it steers the Opec to favor market share over prices in a bid to drive out high-cost producers.
“The Saudis probably feel their strategy is working and rightly so,” Francisco Blanch, Bank of America head of commodities research, said by phone from New York. “There’s a major decline in the US rig count, and a huge reduction in capex spending. That’s a sign the strategy is working.”
At Opec’s November 27 meeting, Saudi Arabia, the United Arab Emirates, Kuwait and Qatar rebuffed objections from the other eight members—in particular Iran, Venezuela and Algeria—to their plan. While there may be resistance at the June 5 conference, all but one of the 34 analysts and traders surveyed by Bloomberg said Opec will maintain its daily production target of 30 million barrels, ratifying the Saudi strategy.
“The fact that prices have recovered somewhat, and we appear to be past the bottom, that’s something the Saudis will be able to point to in their discussions,” Mike Wittner, head of oil market research at Société Générale , said by phone from New York on May 19. “And the other thing they’ll be able to point to is that US production has topped out.”
Brent futures tumbled 33 percent from last summer’s peak of $115.71 a barrel by the start of Opec’s November meeting and extended the loss to $45.19 on January 13. It traded at $63.89 at 11:32 a.m. Singapore time on Wednesday. Bank of America forecasts the grade averaging $62 a barrel this year, while Goldman Sachs Group Inc. sees it slipping to $51 in six months.
US shale oil —extracted by blasting underground rock with liquids at high pressure in a process known as hydraulic fracturing—poses a more serious threat to Opec than previous forms of new supply because it can be restarted more quickly, according to Goldman Sachs. The number of wells that have been drilled but are waiting to be fracked—known as the fracklog —could help add an extra 500,000 barrels a day by the end of the year if prices remain at $65, according to Bloomberg Intelligence.
“Because of the fast-cycle nature of shale—meaning it can be turned on very quickly and turned off very quickly —it should be the marginal barrel,” said Jeff Currie, head of commodities research at Goldman Sachs in New York. “It neutralizes Opec.”
While the members who opposed Opec’s November decision criticized it again early this year, the most recent comments from ministers signal the group will hold steady.
It’s “unlikely” Opec’s output ceiling will change, Iranian Oil Minister Bijan Namdar Zanganeh said on May 24, according to Mehr news agency. The organization will “stick with” its present strategy, Abdulmajeed Al-Shatti, a member of Kuwait’s Supreme Petroleum Council, said on May 12. Venezuelan President Nicolas Maduro, who in January urged the group to consider supply cuts, said on May 23 only that he is working with Opec to raise prices.
Amid reduced oil revenues, Venezuela’s foreign currency reserves have plunged 26 percent in three months to less than $18 billion, the lowest level since 2003, according to central bank data as of May 13. Nigeria’s authorities have already borrowed more than half the amount budgeted for all of this year because of a “cash-flow crunch,” Finance Minister Ngozi Okonjo-Iweala said on May 5.
Bloomberg News