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ANALYSIS

Al-Naimi ... ‘oil demand growing, markets calm’

Saudi oil market strategy beginning to pay off

LONDON, February 26, 2015

By Dmitry Zhdannikov and Alex Lawler

Opec kingpin Saudi Arabia is feeling vindicated after a strategy of allowing oil to flood the market has begun to achieve what it was aiming for.

As a global oil glut pushed prices down 60 per cent between June 2014 and January 2015, signs began to emerge that Opec's rivals, including North American producers, will have to curtail output of their expensive barrels.

Two months into 2015, oil prices have recovered to around $60 per barrel from their January lows of $45 - much faster than Saudi Arabia had hoped for when it convinced fellow Opec members in November not to cut output to defend market share against shale oil and other competing supply.

In his first public comments since oil prices rebounded, veteran Saudi Oil Minister Ali Al-Naimi signalled satisfaction with developments, saying he saw oil demand growing and that markets were "calm".

A day earlier, a senior Gulf Opec delegate said oil prices had started to stabilise around current levels, effectively dropping a price anchor at $60 a barrel and saying he saw no need for any emergency Opec meeting.

"The Saudis are saying - look, everything is happening the way it needs to happen. Others are cutting capex, production growth is slowing and low prices are stimulating demand," said Opec watcher Yasser Elguindi from economic consultants Medley Global Advisors.

Saudi Arabia, the Organization of the Petroleum Exporting Countries' leading producer, is also one of the cheapest oil producers in the world, with production costs of just a few dollars per barrel.

Modern techniques of extracting oil from hard rock, which are behind a US shale oil revolution, are much more expensive and production costs range from as low as $25 and as high as $80 per barrel.

"Of course, the main unknown is how resilient US oil production will be. It may take more than just two quarters for markets to adjust to new patterns. It may take a year or two to sort out what is fair value for crude," said Elguindi.

"Price may need to be at $60 to allow for a rational supply-demand trajectory. It doesn't mean of course that we can't temporarily go to $40 or $80 under certain circumstances," he added.

Samuel Ciszuk, senior adviser on security of supply to the Swedish Energy Agency, believes that Naimi calling for calmness was a sign he was happy with current prices.

"That means he wants prices roughly where they are or somewhat lower. Effectively, Naimi is saying he is OK with the inventory build-up, instead looking ahead towards the slow build of demand growth, to take care of those inventories at a later stage," said Ciszuk.

US shale oil output growth is not expected to start slowing before the second part of 2015. This means an accelerated build up of global stockpiles, which could put oil prices under more pressure.

However, withstanding a long period of oil prices below $60 per barrel might be problematic even for cash-rich Saudi Arabia, not to mention poorer members and traditional Opec price hawks Venezuela, Algeria and Iran.

"It is interesting that Naimi says he doesn't like to talk about oil because he wants calmness," said Olivier Jakob from Petromatrix consultancy.

"After the Opec meeting...we had the oil ministers of Saudi Arabia, Kuwait and the UAE going to the newswires to talk the market down. They did like to talk oil then and (Al-Naimi's current remarks) is probably another indication that they have reached their objective," said Jakob.

He added that another big unknown was nuclear talks between the West and Iran, which could lead to a softening of sanctions against the Islamic Republic and a potential release of as much as 1 million barrels per day of additional oil to the market.

"Any nuclear deal will reopen the gates of speculation about the role of Opec and its place in the current oil market," said Jakob. – Reuters




Tags: Saudi Arabia | Opec | oil price | Al-Naimi | Shale |

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