OPEC Shows It Still Matters, and Right Now It’s Bearish for Oil

The last time OPEC met, its decision to leave output unchanged cast doubt on the group’s relevance.

That was a little premature.

From the ministers’ market-moving comments to the array of oil executives gathered in Vienna to court new ventures, the Organization of Petroleum Exporting Countries showed no loss of stature in the run-up to Friday’s meeting, at which it again decided to maintain its current output target. While OPEC has ceded the role of adjusting supply to balance the market, its strategy of keeping up production is still driving prices lower now -- and possibly higher later on.

Saudi’s Solution to Global Oil Glut: Pump Even More Crude

Saudi Arabia has a response to the global surplus of oil: Raise output to near-record levels and then pump even more.

The world’s biggest oil exporter, having abandoned last year its role of keeping global markets in balance, now has incentive to maximize output and undermine rival producers by using its reserve capacity, according to Citigroup Inc. and UBS AG. Just meeting its own domestic demand this summer will require a lot more fuel, others estimate.

Shale Output Is Falling Faster Than Expected

Shale drillers will see production drop sooner than expected under a U.S. government forecast, a momentum change that hints at an eventual price rally.

Just five months after Saudi Arabia put the market into a tailspin by refusing to cut supply despite a global glut, the shale oil industry will record its first monthly dip since U.S. officials began weighing output in 2013.

The projected production drop is small, just 1 percent. Yet investors took note, pushing oilfield stocks to the top five spots in the Standard & Poor’s 500 Index on Tuesday, led by rig operators Ensco Plc and Diamond Offshore Drilling Inc. The decline lags the idling of rigs because of a backlog of already-drilled wells that have gradually been coming online.

Saudi’s Naimi Optimistic on Oil With Output Close to Record High

Saudi Arabia’s Oil Minister Ali al-Naimi is “optimistic” about the oil market and the world’s biggest exporter is pumping about 10 million barrels of crude a day, close to the record amount produced in 2013.

Saudi Arabia is able to meet demand from any customer, al-Naimi said at a conference in Riyadh, Saudi Arabia, on Sunday. While global demand for oil is improving, there isn’t enough need to raise the nation’s production capacity beyond its current level of 12.5 million barrels a day, he said.

Saudi Looking Beyond Oil Price Slump as Rig Count Spikes

As the global energy industry stares transfixed at a spectacular drop in U.S. rigs, Saudi Arabia is ramping up the number of machines drilling for oil and gas despite a sharp fall in the price of crude.

Industry sources and analysts say the OPEC kingpin is looking beyond the halving of global oil prices since June 2014 to a time when crude could again be in short supply.

Riyadh is therefore keen to preserve what is known as its spare capacity - the kingdom's unique ability to raise oil output quickly at any given moment.

But to achieve that, Saudi Arabia has to drill much more than in the past, after boosting output to record levels to compensate for global supply outages in the past four years.

"The Saudis are probably worried about everyone else reducing capex as a result of low oil prices and about non-OPEC output falling off a cliff at some point. We all know that supply disruptions are unpredictable but they are certain," said Gary Ross, executive chairman of New York oil consultancy PIRA.

"The increase in Saudi rig numbers is like a signal to the industry – let's be rational. We will need supply growth in the future."

Oil Prices Stabilizing, Will Continue to Firm Up: Saudi Adviser

Oil prices have started to stabilize around $60 a barrel in past weeks and will continue to firm up, while crude demand will grow stronger, an adviser to Saudi Arabia's oil minister said on Sunday.

The comments by Saudi oil adviser Ibrahim al-Muhanna suggested that the top oil exporter sees no need to reverse its policy of allowing the market to correct itself without cutting output, despite the steep price drop since June last year.

Kuwait's OPEC governor said last week that OPEC was likely to extend its current production policy at the June meeting, in the first public comment on what will be a crucial decision determining the direction of global oil prices in the second half of this year.

It is still too early to say if OPEC will keep its output ceiling unchanged when the group meets in June, Muhanna said, but he added that he was optimistic about crude oil demand growth and expected future supply to stay "healthy".

Saudi Ups Official Oil Prices Amid Signs of Stronger Demand

Saudi Arabia raised the official selling prices (OSPs) for its oil deliveries to Asia and the United States on Tuesday, in the latest signal OPEC's largest exporter is seeing signs of stronger demand.

The Kingdom raised all U.S.-bound crude prices by $1 a barrel and hiked extra-light crude oil to Asia by $1.40 a barrel, in a vote of confidence oil demand is growing in two of its biggest markets following the price crash since June.

OPEC's February Oil Supply Hits Lowest Since June on Iraq-survey

(source: Reuters)

OPEC's oil supply has fallen this month as bad weather delayed exports from Iraq's southern ports, a Reuters survey found on Friday, slowing an expansion of supplies in the group's second-largest producer.

The survey also found slightly higher output in Saudi Arabia, a sign that the largest producer in the Organization of the Petroleum Exporting Countries is sticking to its strategy of focusing on market share rather than cutting output.

Saudis’ Oil Price War Is Paying Off

(source: bloomberg)

Three months after Saudi Arabia made clear it was going to let oil prices keep tumbling, the strategy is showing signs of working.

U.S. drillers are idling rigs at a record pace, gutting investment plans and laying off thousands of workers.

Those steps highlight how the Saudi-led OPEC decision on Nov. 27 to maintain output levels and protect its market share is having the desired effect -- pushing prices down so far that they threaten to curb output in the U.S. and other non-OPEC countries. Saudi Arabia, the most powerful member of the Organization of Petroleum Exporting Countries, will maintain that tack when the group next meets in June, according to some of the world’s biggest banks.

The strategy “is working,” Francisco Blanch, head of commodities research at Bank of America Corp. in New York said by phone. “It is having the effect that we would expect, which is a decline in investment and ultimately supply, and somewhat higher demand. We think this change is for good.”

The number of rigs drilling for oil in the U.S. dropped by 37 last week to 1,019, the fewest since July 2011, data from Baker Hughes Inc. showed Feb. 20. Since Dec. 5, a total of 556 have been taken out of service. Oil explorers including Royal Dutch Shell Plc and Chevron Corp. have announced spending cuts of almost $50 billion since Nov. 1.

Transocean Ratings

Transocean Ltd., the world’s largest offshore driller, had its credit rating cut to junk Feb. 25 by Moody’s Investor Service on concern the company will increase debt levels while the drilling market deteriorates. It has about $9 billion of borrowings.

Oil has rebounded 14 percent in February, following a drop of more than 50 percent since June, in part because of the decline in drilling, which signaled supply growth will slow. Lower prices also spurred demand from bargain hunters, putting European benchmark Brent crude on track for its first monthly gain since June.

U.S. benchmark West Texas Intermediate for April delivery gained 67 cents to $48.84 a barrel in electronic trading on the New York Mercantile Exchange at 11:38 a.m. Singapore time. Brent added 73 cents to $60.78.

Demand is growing and markets are “calm,” Saudi Arabian Oil Minister Ali Al-Naimi said Feb. 27 in the Red Sea city of Jazan in the nation’s southwest.

U.S. oil production will cease its month-on-month growth in April because of the drop in the rig count, Marios Maratheftis, the Dubai-based global head of research for Standard Chartered Plc, said in Dubai on Feb. 23.

Slowing Output

The U.S. Energy Information Administration reduced its 2015 U.S. crude production forecast to 9.3 million barrels a day in February from 9.42 million in November. The EIA projects output will fall in the third quarter for the first time in four years.

“OPEC’s long-game strategy is on track,” Harry Tchilinguirian, head of commodity markets strategy at BNP Paribas SA in London, said by e-mail. “It’s suffering short-term financial pain for long-term gain.”

There is a cost to OPEC, of course.

Oil’s plunge will reduce the group’s revenue by about 37 percent this year, according to the U.S. Energy Information Administration. Export revenues for 11 of OPEC’s 12 members, excluding Iran, will shrink to $446 billion in 2015 from $703 billion in 2014, the EIA estimates.

Saudi Arabia’s government said Dec. 25 that it expects a budget deficit in 2015 of 145 billion riyals ($38.7 billion), up from 54 billion in 2014.

Criticizing Saudis

The Saudi strategy has been criticized by Venezuela, which the International Monetary Fund estimates will suffer an economic contraction of 7 percent this year, and Iran, which the IMF says will be deprived of $48 billion of revenues over two years. The Nigerian oil minister and current OPEC president, Diezani Alison-Madueke, said she may convene an emergency meeting of the group, as regards this issue.

There’s no plan for such a gathering, according to a delegate who asked not to be named. OPEC’s financially vulnerable members have little sway over policy because they’re unwilling to cut production, leaving decision-making power with Saudi Arabia, according to Mike Wittner, head of oil markets research at Societe Generale in New York.

Even having its own way, Saudi Arabia isn’t guaranteed success, according to Barclays Plc. Global markets remain oversupplied, prices haven’t fallen enough to press OPEC’s rivals into cutting sufficiently and increasingly efficient shale producers could restore output, said Miswin Mahesh, an analyst at Barclays in London.

‘Hard Road’

“It’s still a very hard road,” said Mahesh. “We haven’t really seen an outright chunk of U.S. shale or any other high-cost production falling.”

The U.S. pumped 9.29 million barrels a day in the week ended Feb. 20, the most in three decades, according to the EIA.

On the other hand, the International Energy Agency, a Paris-based adviser on energy policy to 29 developed nations, boosted its estimate of the world’s dependence on OPEC in a Feb. 10 report, citing lower forecasts for other nations. OPEC will need to provide 600,000 barrels a day more in 2019 than the IEA predicted in its previous long-term outlook.

“If I’m sitting in Saudi Arabia, I’d say it looks like the plan is on its way to working,” Wittner said. “It does need to be reflected in real supply. But all the signs are pointing in the right direction.”

Oil Rises Above $62 After Saudi Comment on Demand

Oil rose above $62 a barrel on Thursday as indications of a coming recovery in demand offset a further jump in U.S. crude stockpiles which underlined currently ample supplies.

Crude benchmarks in the U.S. and Europe posted their largest percentage gains in nearly two weeks on Wednesday, supported by remarks from Saudi Arabia's oil minister, Ali al-Naimi, and a slightly stronger-than-expected Chinese manufacturing survey.

Brent crude LCOc1 rose 71 cents to $62.34 by 5.23 a.m. ET, after jumping more than 5 percent on Wednesday. U.S. crude CLc1 fell 40 cents to $50.59, following a more than 3 percent gain in the previous session.

"The comments yesterday, the change of tone from Saudi Arabia, is still an element," said Olivier Jakob, analyst at Petromatrix, of Brent's gain. "The market is still reacting to that."

Brent collapsed from $115 in June on global oversupply, in a decline that deepened after the Organization of the Petroleum Exporting Countries chose to defend market share against rival supply sources, rather than cut its own output.

The price has rallied more than 35 percent from a near six-year low of $45.19 reached in January, supported by signs that lower prices are starting to reduce investment in U.S. and other non-OPEC supply.

A growing number of OPEC officials are making cautiously hopeful comments on the market outlook. This week, the Saudi minister said demand is growing while a Gulf OPEC delegate said demand would rise more strongly in the second half of 2015.

OPEC officials including Naimi had been making more bearish comments. Naimi was quoted in December as saying OPEC would not cut output even if oil fell to $20.

"No more talk of $20 from al-Naimi," Jakob of Petromatrix said in a report. "Analysts calling for $20 a barrel oil will be more shy now."

Underlining currently ample supplies, the U.S. government's latest supply report said domestic crude inventories rose last week to 434.1 million barrels, hitting a seasonal record high for the seventh week.

Brimming U.S. crude supplies are increasing the discount at which U.S. crude is trading to Brent. The spread reached $11.81 on Thursday, the widest since January 2014.

source: Reuters