Saudi oil minister says market should handle low prices

AP News
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Posted: Feb 23, 2016 3:32 PM
Saudi oil minister says market should handle low prices

HOUSTON (AP) — Saudi Arabia's oil minister said Tuesday that production cuts to boost oil prices won't work, and that instead the market should be allowed to work even if that forces some operators out of business.

Ali Al-Naimi said production cuts by big, low-cost producers like Saudi Arabia would amount to subsidizing higher-cost ones — an apparent reference to U.S. shale oil drillers.

Booming U.S. production effectively ended oil trades at more than $100 per barrel that were taking place less than two years ago. A barrel of U.S. crude is now hovering around $30, a price at which many shale operators are assumed to be losing money.

"The producers of these high-cost barrels must find a way to lower their costs, borrow cash or liquidate," Naimi said. "It sounds harsh, and unfortunately it is, but it is the more efficient way to rebalance markets."

Naimi disputed a common view in the industry: that Saudi Arabia has kept pumping oil to protect its market share and undercut shale producers. "We have not declared war on shale or on production from any given country or company," he said.

Naimi spoke at a gathering of global energy leaders in Houston.

The price of benchmark U.S. crude fell Tuesday by nearly 5 percent to $31.81 a barrel. Brent crude, used to price oil internationally, dropped $1.36 to $33.31 a barrel in London.

Just a day earlier, oil prices surged after the International Energy Agency predicted that oil supply and demand would balance next year because of a steep drop in new drilling, namely in the U.S. The group's executive director, Fatih Birol, predicted that crude would more than double to $80 a barrel by 2020.

Shale and other new sources attracted by years of high oil prices pushed the supply of oil much higher than global demand, leading to the sharp drop in crude prices since mid-2014.

OPEC decided in late 2014 that it would not cut production to prop up prices, and Naimi echoed OPEC's thinking. "Cutting low-cost production to subsidize higher-cost supplies only delays an inevitable reckoning," he said.

Analysts expect more U.S. shale operators will fail unless prices rise. Mark Papa, now an investment firm executive and the former CEO of EOG Resources, an early shale-gas producer, said the shale boom created many new companies. In the next year or so there will be "bodies all over the place — a lot of bankruptcies," and drillers who survive will emerge weaker, he said.

Others say that it might not take much of a rally in oil prices for shale drillers to thrive.

Vance Scott, an Ernst & Young consultant to oil and gas companies, said shale operators are continuing to cut costs and can squeeze subcontractors more and improve efficiency with technological advances in drilling.

"They could make a go at $40 and maybe even lower" depending on the field, Scott said. "They will innovate."

While Naimi rejected production cuts as politically unworkable, he endorsed a freeze on production at current levels if major oil-producing countries go along. The freeze idea, floated last week by Saudi Arabia, Russia, Venezuela and Qatar, would be a more gradual path to higher oil prices, but it faces uncertain prospects. Iran, just coming off international sanctions, wants to boost its production.

"If a freeze even gets done it really does not accelerate the rebalancing of the global market, especially with Iran not participating," said Dominick Chirichella, an analyst with the Energy Management Institute. Matching supply to demand would still linger "well into 2017," he said.

The 81-year-old Naimi, who joined Aramco, the old Arabian American Oil Co., as an office boy in 1947, said he had seen oil prices swing from $2 to $147 a barrel. The current price slump, which has led to layoffs across the U.S. oil industry, is just another of oil's inevitable boom-and-bust cycles, he said.

"It is going to end," Naimi said. "When, I don't know, but it will end."