To hear the Saudis tell it, their strategy of doing, well, nothing in the face of falling oil prices seems to be paying off. In the past OPEC has cut production when crude prices started falling, helping artificially to constrict global supply and set a market floor. But this time around Riyadh strong-armed the cartel into a different course of action: conducting business as usual. The hope was that low prices would pressure non-OPEC producers (in particular U.S. shale companies) to cut investments, which would then in turn lead to a decline in non-OPEC production, pushing prices to rebound without petrostates having to do anything.
So, how is that strategy working? In its annual energy outlook, released earlier this week, the International Energy Agency (IEA) reported on “unprecedented” declines in global oil investment, and now, as Reuters reports, Saudi Arabia claims to be seeing evidence its idleness is producing results:
“Non-OPEC supply is expected to fall in 2016, only one year after the deep cuts in investment,” [said Saudi Arabia’s vice oil minister Prince Abdulaziz bin Salman]. “Beyond 2016, the fall in non-OPEC supply is likely to accelerate, as the cancellation and postponement of projects will start feeding into future supplies, and the impact of previous record investments on oil output starts to fade away.”
But as the WSJ notes, the IEA’s outlook also warns that oil could stay as low as $50 per barrel until the end of the decade:
In its World Energy Outlook, the International Energy Agency said “a lasting switch in OPEC production strategy in favor of securing a higher share of the oil market mix” could keep the price of Brent crude at around $50 a barrel through the end of the decade. Under a more bullish scenario, the IEA said oil could rebound to around $80 a barrel by 2020 as the oversupplied market begins to balance.
If that happens, the Saudi strategy will have to be deemed a failure. Most of OPEC’s petrostates require an oil price well above $50 per barrel in order to balance their national budgets, and the longer they run in the red, the less stable their regimes. And not every petrostate is happy waiting out the bearish market, either—Venezuela and Algeria have been outspoken with their criticisms of the OPEC strategy. Moreover, Oman’s oil minister said this week that the cartel’s inaction was “irresponsible”, adding that “[w]e are hurting, we are feeling the pain and we’re taking it like a God-driven crisis…I think we’ve created it ourselves.”
Even with investment cuts, there’s still a hefty global supply of crude. Dozens of oil tankers have taken to anchoring off the coast of Houston, physical evidence of the international glut. That’s not just an American phenomenon, either. “We’re seeing ships idling off the coast of China, Singapore, (the) Arab Gulf, and now the U.S. Gulf. It appears that the glut of supply in the global market is only getting worse”, said commodity analyst Matt Smith. Those ships are idle in large part because OPEC has been as well, and with demand looking unlikely to spike anytime in the near future, there’s little reason to expect a big resurgence in prices. It’s a bad time to be in the business of selling oil.