Back in February sources from OPEC told media that Saudi Arabia is aiming for oil prices of $60 as the optimal price to encourage fresh investments in production while deterring shale boomers from further increasing their own output too much. Now, according to the Wall Street Journal, Saudi Arabia is joined in these ambitions by Kuwait and Iraq.
It seems the $55-per-barrel that Gulf producers earlier believed would help them to return their economies to growth has turned out to be insufficiently high, thus the new $60 target. Iraq’s Oil Minister Jabbar al-Luaibi confirmed this plainly: “Iraq wants prices to rise to $60. This is our aim.”
We can easily understand why $60 is much more attractive for Gulf producers: earlier this year Fitch warned that most Middle Eastern and African oil producers would remain in the red this year, with average oil prices at $52.50 a barrel, as estimated by the ratings agency.
Middle Eastern producers are heavy public spenders, and it takes more than two years to reform these spending habits in a way that would make them more suitable for a low-price environment. After all, just a year before prices crashed, Saudi Arabia’s then-Oil Minister Ali al-Naimi said that $100 a barrel was a “reasonable” price for oil. Apparently, not for long.
The report about some Gulf producers striving for $60 a barrel comes on the heels of the International Energy Agency’s latest Oil Market Report, which found that over the first quarter of the year, global crude oil stockpiles did not decline as a result of OPEC cutting production, as one would have expected. Instead, stockpiles actually went up during the period.
At the end of March, based on estimates for that month and final data for January and February, the IEA puts total OECD inventories at 330 million barrels above the five-year average. The culprit: U.S. shale producers, whose rising output has caused a string of massive buildups in domestic inventories.
Now, according to some, such as RBC’s commodity analysts, this buildup was due to refinery maintenance season rather than a very big increase in production. In fact, these analysts estimated that refinery maintenance accounted for as much as 64.2 percent of the overall stockpile increase, versus a meager 11.5 percent from additional production. Simple logic suggests that with refineries exiting maintenance season, we should soon start seeing draws in inventories. Last week, the EIA already reported a 2.2-million-barrel draw in commercial oil stockpiles.
So far, so good, but it remains to be seen whether RBC’s estimates are correct: after all, the active rig count across the shale patch has been rising steadily over the last few months. and there are no indications that this trend will be reversed anytime soon.
A production cut extension could push prices up higher, indeed, but for how long? What we have seen since the end of November and December, when OPEC and 11 non-OPEC producers agreed to start cutting, suggests that on its own, such a deal is not enough to send prices in the right direction. It takes more, including factors such as geopolitical events and supply and demand news from the world’s biggest consumers and producers.
The output cut extension seems to be all but certain, and international prices are reflecting this, which means when the news is officially announced in late May, markets may react more calmly than some would expect. Meanwhile, in order to comply with their current lower quotas, Gulf producers are having to reduce exports and offer discounts in a bid to preserve market share. All this means lower revenues, despite higher prices. Will that be good enough for the Gulf producers who are fighting unprecedented budget deficits?
By Irina Slav for Oilprice.com
More Top Reads From Oilprice.com: