By Ovunc Kutlu
NEW YORK
The Saudi strategy to protect market share and drive high-cost producers out of the market is still working despite failing to reach a positive outcome at the Doha oil meeting to push crude prices higher, an expert said Tuesday.
After two months of talks, OPEC heavyweight Saudi Arabia, non-OPEC Russia, and other OPEC countries finally met in Doha on Sunday to discuss freezing their individual oil production levels. However, despite high expectations, the talks failed.
"The Saudis feel that their strategy to build market share and put pressure on more expensive producers, such as deep-sea offshore and U.S. shale production, is working," Robert A. Manning, a resident senior fellow of the Brent Scowcroft Center on International Security at the U.S.-based Atlantic Council, told Anadolu Agency.
Although many oil producers, from Russia to Venezuela, are feeling the negative impact of low oil prices on their economies, the Kingdom is doing relatively better and can endure lower prices longer.
"They [Saudis] have enough in their national foreign reserves -- still around $600 billion -- to continue production in the 10 million barrels per day (mbpd) range with oil [prices] in the $30-$60 a barrel range at least well into 2017," Manning said.
Stressing that there are limits to how much pain the Saudis are willing to endure against low oil prices, Manning added "Riyadh is reasonably satisfied that its strategy has gained it ample market share." He also noted that talks of freezing oil production arose when prices drifted below $30 a barrel in January.
During the last three months prices climbed, and reached almost $45 a barrel early last week, with the hopes of a deal to freeze output. That provided some breathing room for all producers against low prices, but especially Saudi Arabia -- one of the countries which has the lowest crude production cost in the world.
Thomas Pugh, a commodities economist at London-based Capital Economics, said Saudi Arabia has a spare capacity of over 2 mbpd, which it has "traditionally kept as a buffer against unexpected supply shocks."
"Admittedly, comments from Saudi Arabia’s Deputy Crown Prince, Mohammed bin Salman, published on Saturday, raised the prospect that it could boost production if there was no agreement to freeze output," he added.
Same tensions, different day
In addition to comments signaling a production hike, the Kingdom also said Saturday that it would not agree to a production freeze deal unless all producers, including Iran, would do the same.
However, after having sanctions lifted on January, Tehran has been adamant to raise its oil output to pre-sanctions level of 4 mbpd, and said it would not freeze its production.
"With Iran sanctions lifted, Tehran is anxious to boost exports as quickly as possible and recover market share," Manning said, and pointed to other tensions between the two regional rivals.
"Obviously, the backdrop of the Sunni-Shia proxy war led by the Saudis and Iran, respectively, did not make for OPEC comity. But, I would argue that it is was conflicting economic/oil strategies that drove the divide more than any political rivalry," he explained.
Iran did not send a representative to the Doha summit on Sunday, and Tehran's stance in continuing to raise its oil output is expected to be its norm at least until OPEC's next biannual meeting in Vienna on June 2.
The oil game is changing
"We do not expect OPEC’s next meeting in June to be any more productive unless Iran or Saudi Arabia significantly change their stance over the next few weeks," Pugh noted.
However, the oil market has undergone significant changes in the last decade, with the entrance of the U.S. as a major player and OPEC needs to adjust to this new reality.
"The surge in non-OPEC production over the past 6-7 years has made OPEC increasingly inconsequential. In particular, the surge in the U.S. oil and gas production resulting from the shale revolution, has upended OPEC," Manning said.
U.S. oil production jumped from 5 mbpd in 2008 to almost 9.7 mbpd in April 2015 -- the highest domestic level since 1973. Although the U.S. shale oil producers are hurting against low prices, and domestic output fell below 9 mbpd for the week ending April 8, they can still boost their production when oil prices climb higher.
"The U.S. shale producers have become more efficient and are prepared to ramp up production when prices move into the $50 range. Moreover, new U.S. policies permitting oil and gas exports will increasingly compete with OPEC for market share. I think the Saudis understand that there are forces well beyond Iran that are decreasing OPEC market power," Manning explained.
Rebalancing in sight?
However, Pugh emphasized that he expects a significant drop in non-OPEC production this year, especially in the U.S since the number of oil drilling rigs in the country fell to its lowest level since 2009.
"The oil market will continue rebalancing without direct support from OPEC or other major producers," he said, emphasizing global demand growth.
"We think that demand growth will remain strong this year. The most recent economic data from China was positive and indicates that a cyclical rebound is underway. Fuel demand in India and the U.S. also continues to show robust growth. This should mean that the oil market rebalances by the end of this year or early next year, even without a production freeze," he explained.
Pugh added that he expects oil prices to rebound by the end of 2016, forecasting that both Brent crude and American benchmark West Texas Intermediate will reach $45 per barrel.
"We then expect a steeper rise in prices next year, to $60 per barrel, as demand continues to grow, while supply falls, or at least remains stable," he concluded.
