Saudi Resistance to Output Cuts Hurting Shale – 3/1/16

Optimism following output freeze talks between Saudi Arabia and Russia dissolved back into pessimism as Saudi resistance to output cuts was emphasized by a top official.

Those believing coordinated effort to restore oil prices was in the works saw another disappointment as comments made by Saudi Arabia’s petroleum minister on Tuesday make clear the country’s position. “There is no sense wasting our time seeking production cuts,” Ali bin Ibrahim al-Naimi told energy executives at the annual IHS CERAweek conference. “That will not happen… Even if they say they will cut production, they will not deliver.” These comments are in line with previous thinking outlined on this site that a lack of trust and conflicting goals will prevent OPEC action, including keeping additional Iraq and Iran barrels off the market. As OPEC’s largest producer and de facto leader, Saudi Arabia is essential to uniting producers so negative comments from one of the most influential voices of the country are a clear sign that an output reduction agreement, or even an output freeze, is not forthcoming.

Analysts have expressed skepticism that either Russia or Saudi Arabia is even capable of producing more than what they would be frozen at. Russian production is already declining as insufficient investment, due to sanctions and lost oil revenue, has meant a failure to replace aging production.

Ali al-Naimi told global energy industry leaders that rebalancing in the oil market would have to depend on low prices forcing out high-cost producers. US shale drillers make up a large portion of those set to get forced out as they try to survive the wave of restructurings and bankruptcies expected in the coming months. After surprising analysts with their ability to lower costs and borrow cash to avoid liquidation, shale drillers are running out of tricks to keep their rigs pumping. Hundreds of drillers are expected to bow out during the current oil glut which is expected to last well into 2017.

Print Friendly, PDF & Email

Comments are closed.