Saudi Arabia Now Believes Oil Prices Could Stabilize Around $60 a Barrel
OPEC’s Biggest Oil Producer and Other Gulf States Are Having to Adapt to the Rapid Drop in Oil Prices
LONDON—OPEC’s biggest oil producer Saudi Arabia now believes oil prices could stabilize at around $60 a barrel, a level both it and other Gulf producers believe they could withstand, according to people familiar with the situation.
The shift in Saudi thinking suggests the de facto leader of the Organization of the Petroleum Exporting Countries won’t push for supply cuts in the near-term, even if oil prices fall further. Brent crude was trading at just over $70 a barrel on Wednesday.
It also shows how quickly OPEC members are having to adapt to changes in the oil market caused by a surge in supply from the U.S. shale revolution allied to slowing global demand growth. As recently as early November, OPEC officials were talking about $70 a barrel as the level at which there would be “panic” within its ranks.
The Gulf states “don’t have a price target and if prices drop further below $60, it won’t be for a long time,” a Gulf oil official said.
Before last week’s OPEC meeting in Vienna, the Saudis had been considering a Venezuelan proposal to cut the producer group’s oil output sharply. The possible deal finally fell apart when Russia, a major oil producer that is not a member of OPEC, refused to participate in a general supply cut, according to people familiar with the situation.
That gave Saudi Arabia and its Gulf allies cover to push an unpopular strategy at OPEC’s main meeting last Thursday of not changing the cartel’s production target, in an attempt to defend market share rather than prices. That view prevailed, leading Brent crude to fall nearly 9% in the past week.
During an early November meeting on the Venezuelan resort island of Margarita, Saudi Arabia’s oil minister Ali al-Naimi had told Venezuela’s foreign minister and OPEC representative Rafael Ramirez he would support a cut only if the Venezuelan minister could convince others both inside and outside of the cartel to participate, according to people familiar with the situation.
It was a “mission impossible,” said one OPEC delegate. Struggling OPEC members like Iran, Libya and Iraq argue they should be exempted from any move to cut output. Historically, persuading non-OPEC members to join the group in reducing supply has met with limited success.
However, just 48 hours before OPEC’s semiannual meeting last Thursday, Mr. Ramirez gathered senior energy officials from Saudi Arabia, Russia and Mexico—another non-OPEC member—in Vienna’s Hyatt hotel.
On the table was a proposal to take 2 million barrels a day of oil supply out of the market, according to people familiar with the situation. The bulk of the cut was to be shouldered by OPEC, but Russia and Mexico were expected to contribute a reduction of 500,000 barrels a day, the people said.
But the meeting ended without any deal to cut supply, Mr. Ramirez told reporters immediately afterward. Within hours, Russia’s state oil company OAO Rosneft said it would not cut its oil output.
Mr. al-Naimi finally decided it would be better to endure short-term pain from low oil prices than risk losing market share in the long run, according to people familiar with the situation.
“The market will stabilize itself eventually,” Mr. al-Naimi said.
He conveyed this message first to his Gulf allies—countries such as Kuwait and the U.A.E.—and then during a four-hour debate among all of OPEC’s ministers last Thursday, according to delegates briefed on the gathering.
Mr. al-Naimi rebuffed calls led by Venezuela for the oil-producing cartel to reduce its output by 5%, arguing it would cost OPEC market share without guaranteeing prices would improve, the people said.
Mr. al-Naimi told the ministers that enduring lower prices would force high-cost oil producers outside of OPEC, like U.S. shale oil companies, to cut back production themselves, tightening the market by the second half of 2015, the people added.
The rest of OPEC gave in to Saudi pressure and the cartel reluctantly agreed to maintain its oil production at 30 million barrels a day. On Tuesday this week, the kingdom’s cabinet said OPEC’s decision reflected the group’s “cohesion and unity”.