Saudis move to shore up OPEC – oil minister goes to Venezuela as crude slides
5 Nov 2014
ISAAC ARNSDORF, WAEL MAHDI AND GRANT SMITH
Saudis move to shore up OPEC
Oil minister goes to Venezuela as crude slides
The Saudi oil minister’s visit to Venezuela this week is also a trip through time.
Flash back to December 1998 when Saudi Arabia looked to its fellow OPEC member for help lifting oil prices from about $ 10 US a barrel.
Back then, the Saudis were defending their dominance in the global oil market from new suppliers in Latin America. Now the desert kingdom is cutting prices to the U. S. to contend with upstart shale producers. To win the showdown, the Saudis are trying to bring OPEC’s weaker members in line before the Nov. 27 meeting of the organization, said Seth Kleinman, head of European energy research at Citigroup Inc. in London.
“Shale is in the Saudis’ sights,” Kleinman said by email. “It’s going to be shale or it’s going to be OPEC.”
Ali Al- Naimi, Saudi Arabia’s oil minister, flew to Venezuela for a conference that starts this week, according to two people with direct knowledge of his plans who asked not to be identified because they’re not authorized to speak to the media. He’s due to attend a gas forum in Acapulco, Mexico, on Nov. 11 and 12.
The trip is reminiscent of the 1990s, when Saudi Arabia’s competition with Venezuela and Mexico for shipments to the U. S. Gulf Coast drove down prices, according to Mike Wittner, head of oil market research at Societe Generale SA in New York. Al- Naimi may be collecting pledges to cut production, he said.
“Saudi Arabia wants to see a cut shared out between all the members of OPEC,” Wittner said by phone. “You’d expect Venezuela to say, ‘ We’ll consider it if everyone else does it as well.’ It’s all about shared pain.”
The Organization of Petroleum Exporting Countries is under pressure because of the historic expansion of U. S. production from hydraulic fracturing and horizontal drilling. U. S. fields are pumping 8.97 million barrels a day, the most since the 1980s, according to the U. S. Energy Information Administration. Meanwhile, global consumption will increase the least since 2009 as economic growth slows in Europe and Asia, the Paris- based International Energy Agency said.
West Texas intermediate crude, the U. S. benchmark, touched a threeyear low of $ 75.84 a barrel Tuesday, down from $ 107.73 on June 20. Citigroup changed its forecast for WTI on Oct. 20 to $ 84 a barrel next quarter, from a previous estimate of $ 89.50.
The shale boom sets up a direct challenge as the U. S. is poised to leapfrog Saudi Arabia and Russia as the world’s largest oil producer. The IEA initially said that would happen by 2020, then last November moved up its prediction to 2015. Saudi Arabia’s output rose one per cent to 9.75 million barrels a day in October, according to data compiled by Bloomberg. The kingdom remains the world’s biggest oil exporter.
The Saudis can stem the growth of shale oil as even temporarily lower prices dim investors’ enthusiasm to fund drilling, according to Kleinman, the Citigroup analyst. About one- third of U. S. shale production loses money at $ 80 a barrel, according to Sanford C. Bernstein & Co. A Bloomberg Intelligence stock index of North American exploration- and-production companies dropped 20 per cent since Oct. 1.
Saudi Arabian Oil Co., the stateowned producer, lowered the premium for sales to the U. S. Gulf Coast by 45 cents a barrel on Nov. 3 to the smallest since December. At the same time, Aramco increased prices for exports to Asia and Europe.
“The fact that they’re cutting prices in the U. S. and not in other areas does seem to lend credence to the theory that they are going after U. S. shale production, which has been the biggest threat to their market share,” said Chad Mabry at MLV & Co. in Houston. “It’s a reminder that even with the balance of power in the oil market seemingly shifting to the U. S., it’s the Saudis that really can dictate big swings in the market if they decide to.”
Supplies are surging within OPEC. Libyan output almost tripled since June to 850,000 barrels a day and Iraq pumped 3.3 million barrels a day in October. The bloc’s total production rose to a 14- month high of almost 31 million barrels a day.
The bear market is a bigger strain for weaker economies such as Venezuela. “The Venezuelans are the most worried because they are in the worst fiscal situation,” said Sarah Emerson of ESAI Energy Inc. in Wakefield, Mass. “It makes perfect sense for Naimi to visit Venezuela, the most fragile country in OPEC.”