Saudi Change Of Tack Unlikely To Boost Oil Prices

Saudi Arabia has completed a surprising U-turn in agreeing with the rest of OPEC to cut oil production.

For two years, the Saudis have driven forward a policy of maintaining production in the face of plunging prices.

The result is an ocean of crude sitting in storage tanks and tankers hastily taken out of mothballs.

The policy was aimed at forcing other producers out of business.

As the price of a barrel of crude dropped from more than $100 to around $40, reserves that were more expensive to source became more economical to produce.

The specific target was the US and Canadian shale oil industry.

Humble pie

Improving technology and falling prices meant companies could make a profit out of shale oil.

Now, the Saudis have teamed up with non-OPEC Russia – another of the world’s leading producers – to stress North American oil production by agreeing to switch off the tap.

OPEC has agreed to cut production by 2%. It’s not a huge amount but may be enough for the Saudis to plug a huge budget deficit and look again at how their economy is based on oil.

The problem is the cut is in current production, which has been boosted over the past year so the U-turn only means returning to previous levels rather than going any further.

To force through the move, the Saudis have had to swallow their pride and no doubt eat a lot of humble pie.

The Saudi policy of keeping oil flowing has put a lot of oil producing countries in financial difficulties.

They have also had to do a deal with competitors in Moscow and Iran.

Battle still to come

Some speculators feel the move will stabilise and even push up the price of oil to around $60 a barrel.

But with President-elect Trump promising to make the US independent of outside energy supplies, OPEC still has a battle to fight to stay competitive.

“In the medium term, we can expect tighter market balances but for a substantial price recovery to take place, significant demand growth will be required to draw down high inventories of crude and products,” said Shakil Begg, head of Thomson Reuters Oil Research and Forecasts.

OPEC has pledged to reduce output by 1.2 million barrels a day and wants non-OPEC suppliers, such as the US, to reduce their supplies by another 600,000 barrels a day.