Here’s why the Saudis have proposed to freeze oil
production….
The Saudis said this morning that the Kingdom is willing to
freeze production at January levels of output, alongside Russia, Qatar
and Venezuela in order to support the international oil price. “Freezing now at
the January level is adequate for the market, we believe” said Ali Al-Naimi,
Saudi Arabia’s oil minister. “We recognise today the supply is going down
because of current prices. We also recognise that demand is on the rise.” But
what’s really going on?
Because the oil price has been falling like a stone
and has been showing no signs of recovery…
The price of
barrel of Brent crude is down 70 per cent since the summer of 2004 to around
$33. And some
analysts have
forecast that it might eventually fall as low as $10 a barrel unless global
supply is cut back. Saudi has been saying that it will not cut production in
response to the price falls, predicting that prices would soon bounce back to
more normal levels. But prices have fallen much more than the Saudis expected
and now they are starting to get seriously alarmed.
Because Saudi is the world’s second largest oil
producer …
The Kingdom
has the power to influence the global price of oil by increasing or cutting
back supply. It is also de facto leader of the OPEC cartel of producers. No
plan by producers to cut back supply can work unless Saudi participates.
Because the Saudi Arabian state is at risk of
bankruptcy if the oil price falls too low…
Last October,
when the oil price was still at $50 a barrel, the International Monetary Fund warned that Saudi was
on course to run out of financial assets within only 5 years if it carried on
spending at the current rate. Since then Saudi has announced some major
austerity measures in response to its deterioriating finances. But the
oil price has also fallen further, intensifying the fiscal pressure on the
government.
Because the Saudi stock market has been collapsing,
driven by bankruptcy fears for its oil-industry companies…
Stock markets
all around the world have been hit by heavy selling this year. And the biggest
falls have been in Saudi stocks. Saudi wants to prop up the value of its
corporate sector and the only way to do this is to stabilise the oil price.
But Saudi doesn’t want to halt production entirely
because they still want to squeeze out US shale producers….
One of the
primary reasons the global oil price has collapsed is that some much additional
supply has been pumped into markets by US shale oil producers. US shale
production has fallen since last year, but it has not totally collapsed. The
Saudis hope that the rout of the global price will ultimately drive these
relatively high cost American rival producers out of business, enabling the
kingdom to grab back lost market share when the price ultimately recovers. So
the Kingdom wants the oil price to stabilise, but it doesn’t want it to bounce
back to the levels of two years ago, which incentivised the US producers to
invest heavily.
And the Saudis want a low oil price to hurt their
Iranian rivals…
Western
sanctions on Tehran are being lifted after
last year’s landmark nuclear deal. And Iran now plans to start selling its oil
again on the global market. Last week Iran loaded three tankers to bring its
oil back to Europe for the first time since 2012. Saudi does not want the
Iranians, its major regional rivals, to profit too much from their new exports,
so the Kingdom wants the oil price to remain relatively weak.
That’s why the oil price rose initially, but then
fell back…
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