Tue, May 10, 2016 page14

• Saudi oil head chases record output

  • Bloomberg
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  Saudi Arabia is likely to keep producing crude at near-record levels under its newly appointed Saudi Arabian Minister of Petroleum and Mineral Resources Khalid al-Falih, as the world’s largest exporter sticks with his predecessor’s policy of defending market share against higher-cost shale.

  Al-Falih, also chairman of the state producer Saudi Arabian Oil Co, said on his first day in office on Sunday that he would maintain the kingdom’s oil policy. His predecessor, former Saudi Arabian Minister of Petroleum and Mineral Resources Ali al-Naimi, had been leading a policy prioritizing sales over prices since 2014, driving some higher-cost producers, including US shale drillers, off the market. In so doing, Saudi Arabia boosted output, adding to a supply glut. The strategy is showing signs of succeeding this year, with prices gaining more than 60 percent since tumbling to a 12-year low in January.

  Saudi Arabia could exceed its record output of more than 10.5 million barrels per day if it pumps more to meet a seasonal surge in domestic demand during the summer months, analysts from Emirates NBD PJSC and Qamar Energy said. The nation, with the world’s second-largest oil reserves, pumped 10.27 million barrels per day last month.

  “If the market considers the appointment as signaling more of the same for Saudi policy, that could allow prices to continue following their gradual trend upward,” said Edward Bell, a commodities analyst at Dubai-based bank Emirates NBD.

  Continuity in Saudi policy might be offset by an immediate impact of Canadian forest fires forcing about 1 million barrels of daily crude production offline, he said.

  Saudi Arabia appointed al-Falih on Saturday to head the newly expanded Saudi Arabian Ministry of Energy, Industry and Mineral Resources. He replaces al-Naimi, a 20-year veteran in the post. Al-Falih takes over the ministry responsible for most of the nation’s income as the biggest producer and de facto leader of OPEC embarks on an economic overhaul designed to make it less reliant on petroleum.

  “Saudi Arabia will maintain its stable petroleum policies. We remain committed to maintaining our role in international energy markets and strengthening our position as the world’s most reliable supplier of energy,” al-Falih said in a statement on Sunday.

  Brent crude plunged to less than half of its annual average of more than US$100 a barrel from 2011 through 2014, adding urgency to the push for changes in Saudi Arabia and other energy exporters in the region. Brent crude in London added 1.4 percent to US$46.02 a barrel by 1:02pm Singapore time yesterday, a partial recovery from its intraday low of US$27.10 a barrel on Jan. 20.

  “They will continue the policy of relatively high oil production with no freeze and no deals,” said Robin Mills, chief executive officer at consultant Qamar Energy in Dubai. “It depends how aggressive the Saudis are in pursuing high production for extended periods and how willing they are to accept lower prices for longer.”

  “Al-Falih has been backing the policy and he had been taking a more public role as a government official in defending the stance,” Mills said. “There is a new king, new power behind the throne and now you have a new oil minister.”

  Non-OPEC supply is poised to slip by about 700,000 barrels a day this year, while demand is forecast to rise by about 1.2 million barrels daily, according to the International Energy Agency. Al-Falih, speaking in January at the World Economic Forum in Davos, Switzerland, indicated that Saudi Arabia plans to act vigorously to defend its market share and exports as the market rebalances. He is to face that challenge when he represents Saudi Arabia for the first time at the next OPEC meeting on June 2.

  “If oil prices continue to be low, we will be able to withstand them for a long time,” al-Falih said in Davos.

  Analysts suggested al-Falih might take a harder line in upholding the Saudi market share policy within OPEC. He is a close ally of Saudi Deputy Crown Prince Mohammed bin Salman, who has taken a hands-off approach in letting oil markets determine crude prices, rather than seeking to target a level. The prince is letting the market dictate prices, with Saudi Arabia only adjusting its production to respond to demand.

  “Al-Falih will probably be more direct with its OPEC partners, like Venezuela and Iran,” Fabio Scacciavillani, chief economist of the Oman Investment Fund, said in an interview on Sunday in Dubai. “It is not an appointment in view of the next OPEC meeting. It is an appointment for the next 10 years and beyond.”

  Venezuela — holder of the largest crude reserves — and Saudi Arabia’s regional rival Iran have traditionally pushed for curbing output at times of low prices. Iran, emerging from international economic sanctions, is putting supply back on the market and challenging Saudi Arabia for new buyers in Asia. A Saudi and Russian-led meeting in Doha last month ended in disagreement about a plan to freeze production to prop up prices after Iran refused to limit its output.

  “Until supply balances with demand, it is unlikely there will be any major change in Saudi production,” Scacciavillani said. “Saudi energy policy is a function of reality in oil markets, not a function of choice.”
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