Privately, Saudis tell oil market: get used to lower prices

Tuesday, 14 October 2014 01:11 - - {{hitsCtrl.values.hits}}

Reuters: Saudi Arabia is quietly telling oil market participants that Riyadh is comfortable with markedly lower oil prices for an extended period, a sharp shift in policy that may be aimed at slowing the expansion of rival producers including those in the U.S. shale patch. Some OPEC members including Venezuela are clamoring for urgent production cuts to push global oil prices back up above $100 a barrel. But Saudi officials have telegraphed a different message in private meetings with oil market investors and analysts recently: the kingdom, OPEC’s largest producer, is ready to accept oil prices below $90 per barrel, and perhaps down to $80, for as long as a year or two, according to people who have been briefed on the recent conversations.

The discussions, some of which took place in New York over the past week, offer the clearest sign yet that the kingdom is setting aside its longstanding de facto strategy of holding prices at around $100 a barrel for Brent crude in favor of retaining market share in years to come. The Saudis now appear to be betting that a period of lower prices – which could strain the finances of some members of the Organization of the Petroleum Exporting Countries – will be necessary to pave the way for higher revenue in the medium term, by curbing new investment and further increases in supply from places like the U.S. shale patch or ultra-deepwater, according to the sources, who declined to be identified due to the private nature of the discussions. The conversations with Saudi officials did not offer any specific guidance on whether - or by how much - the kingdom might agree to cut output, a move many analysts are expecting in order to shore up a global market that is producing substantially more crude than it can consume. Saudi pumps around a third of OPEC’s oil, or some 9.7 million barrels a day.

BoA oil analyst who predicted downturn now sees floorReuters: As Iraqi militants advanced on Baghdad with M-16s and stolen tanks in June, most investors and traders in the jittery oil markets believed oil prices would spike even higher. But as oil prices crested at $ 115 in mid-June, there were clear indications of the drop that has ensued and shocked markets in the past weeks, according to Bank of America analyst Francisco Blanch, who predicted that oil prices would moderate in the fourth quarter. Blanch told Reuters in an interview that graphs of the forward price curve and signals from leaders of Saudi Arabia that they were comfortable with lower prices pointed to increasing supplies and a decline in prices. Still, even Blanch - who has been one of the most bearish analysts in the industry this year - has been surprised by the size of the recent rout that has wiped more than 20% off the oil price since the start of September. Now, Blanche expects Brent to stabilize in the next few weeks, but sees the potential for deeper declines in WTI. Brent forward spreads - the difference between the nearby and future prices - paint a picture of growing stability, Blanch said. “Front to second and front to third-month differentials in ICE Brent are narrower than they were 2 to 3 weeks ago,” he said. “I think we can go a little bit lower for Brent.” His downbeat assessment was particularly stark in an increasingly bullish market on June 16 when Secretary of State John Kerry warned of air strikes in Iraq. That news sent prices to $ 113 a barrel. But Blanch reaffirmed his more moderate views with Brent at $ 104 and WTI at $ 90. A risk even remained that WTI oil could slip to $ 50 within two years, his team said in a research note. Brent and WTI were firmly in backwardation, with cash prices sharply higher than forward prices, but pockets of narrowing time spreads along the forward signalling increased supply. “We started to see a weakening in time spreads,” he added. At the time, analysts generally expected fourth-quarter Brent prices of about $ 110 a barrel, and WTI prices of about $ 100.

Asked about coming Saudi output curbs, one Saudi official responded “What cuts?”, according to one of the sources. Also uncertain is whether the Saudi briefings to oil market observers represent a new tack it is committed to, or a talking point meant to cajole other OPEC members to join Riyadh in eventually tightening the taps on supply. One source not directly involved in the discussions said the kingdom does not necessarily want prices to slide further, but is unwilling to shoulder production cuts unilaterally and is prepared to tolerate lower prices until others in OPEC commit to action. OPEC angst With most other members of the cartel unable or unwilling to reduce their own output, the group’s next meeting on Nov. 27 is set to be its most difficult in years. OPEC has agreed to cut production only a handful of times in the past decade, most recently in the aftermath of the 2008 financial crisis. On Friday, Venezuela - one of the cartel’s most price-sensitive members - became the first to call openly for emergency action even earlier. Foreign Minister Rafael Ramirez said “it doesn’t suit anyone to have a price war, for the price to fall below $100 a barrel.” On Sunday, Ali al-Omair, oil minister of Saudi Arabia’s core Gulf ally Kuwait, appeared to be the first to articulate the emerging view of OPEC’s most influential member, saying output cuts would do little to prop up prices in the face of rising production from Russia and the United States. “I don’t think today there is a chance that (OPEC) countries would reduce their production,” state news agency KUNA quoted him as saying. Omair said that prices should stop falling at around $76 to $77 a barrel, citing production costs in places like the United States, where a shale oil boom has unexpectedly reversed dwindling output and pushed production to its highest level since the 1980s. Saudi oil officials have made no public comments on the deepening swoon in markets. Senior officials did not reply to questions from Reuters about recent briefings. Don’t be surprised below $ 90 Global benchmark Brent crude oil futures have fallen steadily for almost four months, dropping 23 percent from a June high of over $115 a barrel as fears of a Mideast supply disruption ebbed, U.S. shale production boomed and demand from Europe and China showed signs of flagging. Until recently, Gulf OPEC members have been saying that the price dip was a temporary phenomenon, betting on seasonal demand in winter to prop up prices. But a growing number of oil analysts now see the latest slide as something more than a seasonal downswing; some say it is the start of a pivotal shift to a prolonged period of relative abundance.