Oil market lacks an anchor: Saudi oil official

OREANDA-NEWS. October 15, 2015. The absence of a market leader and anchor in the international oil market is contributing to uncertainty and volatility and cannot continue, said Saudi oil ministry adviser Ibrahim al-Muhanna in comments sent to Argus.

"Under current conditions, the international oil market may remain unstable, because there is a great deal of uncertainty in the absence of a market leader or anchor," said al-Muhanna in a speech delivered at a closed energy meeting in Kuwait last week. "This ultimately means the inability of current investors in the market to identify an appropriate price now and in the future," he added. This will bolster the influence of analysts, specialised consultancies, political, economic and financial developments, the media "and even various kinds of rumours" on the oil market "creating sharp price swings," he added. This has "negative effects on producers, consumers and the petroleum industry, and is an abnormal situation, the persistence of which is difficult to imagine," said al-Muhanna.

He did not indicate when he thought current market conditions would change.

Oil will remain the main source of energy globally for several decades to come, said al-Muhanna. "The world needs a stable oil market in terms of prices, a balance between supply and demand and the existence of ample future investments and spare production capacity to be used during unexpected crises."

Such stability "is a global necessity, and is not a matter of the wishes of this state or that, but achieving it requires a clear and robust system", said al-Muhanna. "The current vacuum is abnormal and cannot continue."

The vacuum and "the absence of an institutionalised international system for market stability is not limited to Opec countries and other producing states, but also includes the main consumer countries", al-Muhanna added.

He referred to several ideas to involve consumer countries in a system to guarantee oil market stability. These include expanding the roles of the IEA, the International Energy Charter and the Riyadh-based International Energy Forum in the energy sector.

Oil prices had begun sliding in mid-2014 because of "fears about falling oil demand" and three other factors, said al-Muhanna. The first was the rise in shale oil output in the US since 2011 to over 4mn b/d, with expectations that it would continue rising until 2020 and possibly 2025, with further shale output from Argentina, the UK, Russia and some Arab countries. "However, the current fall in oil prices has led to a halt or a major slowdown in investment in and production of shale oil in the US and globally," he said.

The second factor was that high prices in the four years to mid-2014 boosted investment in and production of high cost, difficult reserves, such as ultra-heavy crude, Canada's oil sands and ultra-deep water crude. "The fall in oil prices last year and this year has halted investments in such crudes," he added.

Al-Muhanna's reference to falling investments in shale oil and high-cost reserves amounted to a hint that Saudi Arabia's strategy of defending market share and allowing the price to fall has begun to succeed, although he did not refer directly to Riyadh's strategy.

The third factor was rising Iraqi oil output over the past five years and the prospect of further rises to 2020. "In 2010, Iraq's production was around 2.3mn b/d, it has now topped 4mn b/d, and is expected to continue rising over the next few years, albeit at a slower pace than during the past four years," said al-Muhanna.

His reference to Iraq indicates that Saudi Arabia is closely watching Iraq's rising output, defending its market share from the rising output of other Opec producers such as Iraq and is aware that lower oil prices will limit their capacity growth.

Iraq has reduced its capacity target by 2020 from some 9mn b/d to around 6mn b/d. But even that lower target is in question, as Baghdad finds itself unable to pay the costs and fees of foreign companies operating and developing its largest fields, and has asked them to simply hold production steady this year and next.

Al-Muhanna cites three reasons for the absence of an oil market leader — the refusal of non-Opec producers Russia, Kazakhstan, Mexico, Oman and others to co-operate with Opec to reduce output; Iraq's rising output and the lack of clarity about when Baghdad might agree to participate in output cuts; and Iran's stated intention of boosting output once it is free of most US and EU sanctions to 4mn b/d without co-ordinating such an output increase with Opec.

His words indicate that Saudi Arabia is unlikely to consider resuming its role of leading a strategy that defends oil prices unless other large non-Opec producers join in, and unless Iran and Iraq are willing to co-ordinate their planned rising output with other Opec members.