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A Glimpse Into Saudi Arabia’s Secret Oil Strategy

Faced with an oil glut that is not expected to draw down until late into 2017 and that is depleting oil-dependent government coffers, OPEC is currently seeking ways – again - to stabilize crude prices. OPEC’s de facto leader, Saudi Arabia, is seemingly shifting its pump-at-will policy towards output-freeze talks within and outside the cartel, most notably with Russia, to try to prop up low crude prices and shore up the widening gaps in its heavily-oil-dependent budget.

Timing could not have been better for Ali Al-Naimi, former long-standing Saudi oil minister and one of the Forbes world’s top 100 most powerful people for 2015, to publish his 300-page-odd autobiography ‘‘Out of the Desert: My Journey from Nomadic Bedouin to the Heart of Global Oil”, due out in November.

Also in November, OPEC is expected to discuss whether to limit production to a range of 32.5 million bpd to 33 million bpd. It is also trying to get Russia on board for a production freeze, and so far Russia has suggested it was ready to join talks on a potential freeze.

Al-Naimi – who had been Saudi Arabia’s oil minister since 1995 and was replaced in May of this year – was an outspoken defender of the kingdom’s propensity for maintaining production even in the light of depressed oil prices, in order to keep rivals from taking chunks out of its much-coveted market share.

In his upcoming book, Al-Naimi offers some insights into the politics and policies at play within OPEC and its relations with non-OPEC producers. According to excerpts from Al-Naimi’s autobiography quoted by Bloomberg, back in 2014, the former oilman saw “zero” chance that non-OPEC producers would agree to join deals to cut production.

He also stands by his stance that supply and demand fundamentals should be the drivers of the market.

Recalling a November 2014 conversation with his aides regarding the chances of major non-OPEC producers such as Russia, Mexico, Kazakhstan and Norway to cut oil output, Al-Naimi writes: “I held up my right hand and made the sign for zero.”

Showing that market share was a top priority for Saudi Arabia, Al-Naimi also says in his book, “If we, Saudi Arabia, or OPEC as a whole, cut production without the participation of major non-OPEC members, we would be sacrificing revenues as well as market share.”

Related: OPEC Deal Still Wobbly, But Oil Investment Takes Off

Al-Naimi continues to describe his approach when no consensus was reached in 2014, “So we left it to the market as the most efficient way to re-balance supply and demand. It was -- it is -- a simple case of letting the market work.”

However, the market with oil at around US$100 prompted enormous investments in more cost-intensive projects, such as in U.S. shale, ultra-deep water and the Arctic. In defending such oil prices as fair to consumers and producers, Al-Naimi – while trying to wage an oil-price war on U.S. shale – was actually encouraging investments at those prices.

In his book, he admits that insisting on this “fair price” was a mistake.
“It was very high…That price unleashed a wave of investment around the world into what had previously been uneconomic oilfields.”

The oil glut came soon afterward, and the prices crumbled, driving some U.S. shale plays out of the profitability range, and backfiring on Saudi Arabia’s own policy, opening up a huge budget gap and slowing down economic growth to the lowest since 2009, as the government continues to slash spending to offset weak oil revenues.

Related: Oil Bulls Return To The Market Despite Bearish Fundamentals

So Al-Naimi’s successor at the helm of the oil ministry, Khalid al-Falih, is shifting the Saudi strategy to one that includes working with OPEC and non-OPEC producers to manually stabilize the market through freezes and cuts.

This may be the point at which the Saudis may prioritize higher oil prices over that of market share. The question is, how much (if at all) will they be willing to cut to accommodate the proposed cap across all 14 OPEC members? The other question is, how desperate is Saudi Arabia to raise the price of oil, and does this trump their need to coerce Iran into some agreement that limits production to a figure that falls under pre-sanction production levels?

Yet another unknown is whether any agreement between OPEC and Russia will stick, if any agreement between the two entities can be reached at all.

Al-Naimi says in his book, “I will let history be the judge as to the success of our market-based policy.” History will also be the judge of how successful OPEC is this time around at curtailing the world’s oil production, but we’ll have to wait for more than a month to see if the flurry of OPEC headlines will become a reality—and for Al-Naimi’s book release.

By Tsvetana Paraskova for Oilprice.com

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