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2016-04-29 09:04:43
America, not OPEC, decides the fate of global oil markets
Apr 23rd 2016
WE DON T care about oil prices, Muhammad bin Salman, Saudi Arabia s deputy
crown prince, recently told Bloomberg, a news agency: $30 or $70, they are all
the same to us. Such comments by the man calling the shots in the world s
biggest oil power should be taken with a pinch of salt. Low oil prices cost the
country billions, threaten its credit rating and are turning it from creditor
to debtor: this week it set out to raise $10 billion from global banks. Yet the
claim is not entirely hollow, either. Saudi Arabia is determined not to give
any succour to higher-cost producers, despite the damage the low price does to
its own finances.
At a meeting in Doha, the Qatari capital, on April 17th Saudi Arabia blocked an
agreement between OPEC and non-OPEC producers, such as Russia, to shore up
global oil prices by freezing production at January s level. The idea that such
a deal could have been enforced was fantasy anyway. As Carole Nakhle of Crystol
Energy, a consultancy, points out, Russia is pumping at record levels and there
was no way to police its compliance with a freeze. Iran, which is vowing to
raise output to pre-sanctions levels, had dismissed the notion that it would
take part as ridiculous .
Prince Muhammad apparently forced his negotiators to shun a deal just as they
were about to sign it, insisting that the kingdom would only freeze production
if Iran were prepared to do likewise. Some participants were furious at his
behaviour. The Saudi delegation had no authority to decide on anything , fumed
Eulogio del Pino, Venezuela s oil minister.
For decades Saudi policy has been steered by deft negotiators such as Ali
al-Naimi, the kingdom s oil minister. Now it is under the thumb of the
30-year-old prince, who believes low oil prices will help his drive for
economic reform at home and weaken Iran, Saudi Arabia s arch-rival. For years
we ve been told that Saudi oil policy is driven by commercial and economic
considerations, says Jason Bordoff of Columbia University s Centre on Global
Energy Policy. Yet what happened in Doha seems to have had a big geopolitical
dimension to apply pressure on Iran.
Fortuitously for oil prices, the Doha debacle coincided with the start of a
three-day strike in Kuwait that temporarily dented the emirate s crude
production. Yet that underscored how daft the effort to impose a freeze was in
the first place: low oil prices are already dampening global supply. The strike
in Kuwait was the result of public-sector pay cuts brought on by lean oil
revenues. Schlumberger, an oil-services firm, says it is reducing activity in
Venezuela because the cash-strapped state oil firm there has not paid its fees.
Oil traders say they can no longer get letters of credit to trade with
Venezuela. They also worry about the counterparty risk of dealing with
oil-dependent countries like Nigeria.
The real freeze, says John Castellano of Alix Partners, a debt consultancy, is
taking place in America. Shale producers that borrowed heavily to increase
production in the boom years are likely to flock to bankruptcy court this year
in even greater numbers than in 2015, he predicts. On April 14th and 15th
respectively two such firms, Energy XXI and Goodrich Petroleum, filed for
Chapter 11 protection. Even those that are still going concerns have no money
to invest in maintaining production. As a result, shale production has fallen
by 600,000 barrels a day since its peak last year, according to the Energy
Information Administration, an official body. That, more than any OPEC
posturing, is what is underpinning oil prices.