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Saudi Arabia Warns Oil Market: ‘Will Not Allow Itself To Be Used By Others’

Saudi Arabia Warns Oil Market: ‘Will Not Allow Itself To Be Used By Others’ thumbnail

Khalid Bin Abdulaziz Al-Falih, Saudi Arabia’s energy and industry minister, speaks during the 2017 IHS CERAWeek conference in Houston, Texas, on Tuesday, March 7, 2017. (Aaron M. Sprecher/Bloomberg)

Saudi Arabia’s energy minister, Khalid al-Falih took the stage to deliver the keynote address at IHSMarkit’s CERAWeek conference in Houston and delivered a stern warning to investors about the future of the oil market.

He has no doubt that global demand for oil will continue to climb, particularly in the developing world. Long-term supply, however, is in jeopardy. Although the oil market is oversupplied right now, he is “most troubled by lagging progress in long-cycle development projects needed to provide the base-load of future supplies.” He fears an industry-wide drop in the development of long-term oil resources. This will lead, he warned, to a future marked by severe price spikes, “acute energy poverty” in the developing world and high market volatility.

The cause, he admonished, are “misguided” projections of peak oil demand. It is problematic, in his mind, that some in that some in the industry think demand will only decrease long-term. Asia “is still thirsty for oil” and demand for petroleum imports will continue to grow steadily in the developing world . If investors make decisions based on false forecasts of peak demand, he warned, then underinvestment in oil will compromise global energy availability.

Workers tend to a well head during a hydraulic fracturing operation outside Rifle, in western Colorado. (AP Photo/Brennan Linsley)

Saudi Arabia is not fooled by the exuberant return of short-cycle investment in shale oil and neither should the market. “Regardless of what you might hear elsewhere,” al-Falih said, Saudi Arabia, “Welcomes the return of investors to U.S. shale.” His government has always taken a long view of investment in the energy sector and is continuing to invest and plan accordingly, but he would “love to see some of that [global] investment in short cycle projects shift to long term.”

He had another stern warning to fellow OPEC and non-OPEC producers. Saudi Arabia, he said, is still undecided as to whether the so-called historic OPEC and non-OPEC production deal should be renewed for another six-month period. In other words, other producers should not assume that Saudi Arabia sees continuation of the production cuts as in its interest. The cuts may be abandoned.

Vienna – OPEC press conference at which the organization’s 2017 oil production cuts were announced. November 30, 2017. (author’s collection)

“Depending upon our assessment of the first half of the year we will decide with our partners what to do in the second half,” he said. He is pleased with the overall adherence to production cuts, but reminded the industry that the 1.8 million bpd total reduction is “not huge compared to the size of the market.” Saudi Arabia has, so far, cut beyond its quota. The Saudis, he warned fellow producers, will not continue to shoulder the bulk of the cuts while some participants “have not lived up to expectations.” In a direct message to “free riders” Khalid al-Falih said, “Saudi Arabia will not allow itself to be used by others.  This [agreement] is for the benefit of all and needs to be achieved by contributions of all.”

Specifically, Al-Falih said that Russia’s oil production cuts, a centerpiece of last November’s OPEC—non-OPEC deal, were not good enough in February. His reprimand did not go unnoticed by his Russian counterpart, Alexander Novak. In a CNBC interview after his speech, al-Falih said that Novak had just assured him that Russia is in the process of decreasing its production. Novak told Al-Falih that Saudi Arabia would find that Russia’s cuts during the first week of March were much better.

Al-Falih’s admonition to OPEC and non-OPEC oil producers who joined the production deal is clear: Get in line or Saudi Arabia will use its considerable market influence to drop the bottom out of the oil market. The question is not whether Saudi Arabia has the ability to make good on its threat – its production capacity of 12.5 million bpd and distribution lines to Asian markets make that clear. The question is whether al-Falih has the will to flood the market with oil if Russia, Iraq and Iran fail to live up to their promises come May.

Ellen R. Wald, Ph.D. is a historian and scholar of the energy industry.  She writes and consults on the intersection of geopolitics and energy.


8 Comments on "Saudi Arabia Warns Oil Market: ‘Will Not Allow Itself To Be Used By Others’"

  1. Sissyfuss on Wed, 8th Mar 2017 5:04 pm 

    Nah, even without the bungee cord he’s talking crap.

  2. Boat on Wed, 8th Mar 2017 7:37 pm 

    Let’s cut oil production but please keep drilling for the future, just don’t sell any of it till we tell you to. Although we have congratulated ourselves for cutting oil to a 90 percent compliance we are warning you, many of you are cheating and we will accept the burden. Btw, anybody want to buy the worlds biggest reserve?

  3. Nony on Wed, 8th Mar 2017 7:38 pm 

    If they dump their oil back on the market, we will be back to $40 oil toot sweet. Market already moved down a couple bucks based off of what he said.

  4. GregT on Wed, 8th Mar 2017 10:23 pm 

    “If they dump their oil back on the market, we will be back to $40 oil toot sweet.”

    Now if only every producer in the world would do the same, we could be back to $25 oil again. Just like we had for the better part of a century pre-Oil Glut™.

    I say bring it on. Let’s force all of the producers into bankruptcy, toot sweet. Maybe then we can get on to dealing with more important problems, like global mass extinction.

  5. Cloggie on Thu, 9th Mar 2017 3:52 am 

    Message from global oil salesman:

    “The world will remain interested in our superb product until the cows come home.”

    /end message

  6. twocats on Thu, 9th Mar 2017 9:22 am 

    keep cutting investment. keep running on the stop-gap (LTO) until you’re down to the legacy stop-gap (OPEC spare capacity).

    If bullish bets start heading for the door we could see quite a drop in prices. Then OPEC is cutting and still seeing $40/barrel pricing. That should end well.

  7. shortonoil on Thu, 9th Mar 2017 1:14 pm 

    “This will lead, he warned, to a future marked by severe price spikes, “acute energy poverty” in the developing world and high market volatility.”

    How can you tell if the Saudis are lying; check and see if their mouth is moving. The Saudis are now willing to sell 5% of their 265 Gb of oil (or, so they say) for $2 trillion; or 13¢ a barrel. It sounds like they are planning on booming demand in the future?

    “His government has always taken a long view of investment in the energy sector”

    Long term is now 12 months away, or until the Aramco IPO can be sent to market. Then 5000 Saudi Princesses will be able to live in style for the rest of their lives in the South of France. Otherwise, they will be found swinging from a light pole someplace around Riyadh!

  8. brough on Fri, 10th Mar 2017 5:25 am 

    Shorty, I could say the same about the Russians.
    Don’t believe a word Alexander Novak says unless its backed-up by an international binding contract

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