Is OPEC’s Strategy Actually Working?

ALEXANDER KLEIN/AFP/Getty Images

ALEXANDER KLEIN/AFP/Getty Images

Saudi Oil Minister Ali al-Naimi, the architect of OPEC’s strategy to regain market share by causing the price of crude oil to plunge, says his plan is working, and data from petroleum research firms seems to back him up.

Making his first public comments in two months, al-Naimi told reporters in the southwestern Saudi city of Jazan that the markets have cooled off, and cited Brent crude, the global benchmark, as an example, noting that its price has stabilized at about $60 per barrel.

He also pointed to data that inexpensive oil is driving up demand, notably in China and the United States, which eventually could lead to price stability or to a price rebound.

But Al-Naimi warned naysayers not to upset this new balance. “Why do you want to rock the markets?” he asked. “The markets are calm. … Demand is growing.”

If al-Naimi is right, then his strategy was correct, and it acted quickly. It was only three months ago at OPEC’s headquarters in Vienna that the Saudi minister pushed through a plan to maintain oil production at 30 million barrels a day, declaring a price war with U.S. shale oil producers who rely on costly hydraulic fracturing, or fracking, to extract oil embedded tightly in underground rock.

The U.S. shale producers had not only created a global oil glut, which was depressing the price of oil, but they also had turned their country from OPEC’s biggest customer to a nation headed towards energy independence.

OPEC’s decision led to even lower oil prices, meaning lower revenues, and sometimes even losses, for many oil companies. The financial services concern Cowen & Co. estimates that as a result, total capital expenditures for both production and exploration will plunge by more than $116 billion this year.

As for U.S. shale producers, some folded under the Saudi strategy. Baker Hughes Inc., one of the world’s largest oilfield services companies in the world, reports that the number of oil rigs operating in the United Stated declined by fully 35% since as recently as December 5, leaving the country with the fewest rigs in four years.

There’s more optimistic news, particularly on the smaller retail level. The research group JBC Energy says U.S. demand for gasoline grew by nearly a half-million barrels a day in January. In India, it says, the demand was 18% higher in January than in the same month the previous year.

The JBC report said the allure of cheap fuel can alter driving habits, including what car a customer buys next. And that’s supported by Autodata Publications Inc., which reports that consumers again are opting for cars that are more fuel-hungry: Sales of SUVs and light trucks grew by 19.3% from January 2014 to January 2015, while more economical passenger cars grew by only 7.7%.

Despite this good news for al-Naimi, if the price of oil has finally bottomed out and begins to rise again, won’t the U.S. shale producers get back into the act with a vengeance?

Originally written for OilPrice.com, a website that focuses on news and analysis on the topics of alternative energy, geopolitics, and oil and gas. OilPrice.com is written for an educated audience that includes investors, fund managers, resource bankers, traders, and energy market professionals around the world.

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