The price of oil has been falling since mid-June raising concerns within the OPEC and outside of the organisation whose aim is to regulate and coordinate its members collective output. How did the current situation come about and who stands to gain? Agree or Disagree talks to Tariq Al-Rifai, a financial analyst based in Kuwait and Andrew Critchlow, commodities editor and columnist of the Telegraph.
Will Saudi Arabia’s announcement to drop the oil price for its consumers in Asia become a major game changer on the oil market?
Andrew Critchlow: Yes, I think it will. I think the Saudis indicated that they are willing to buy back the market. They are the world’s ultimate low-cost producer. They have production costs of about $2 a barrel. They have a capacity to pump 12.5 million barrels a day. And they’ve seen their market share being gradually eroded over the last 5 years by the rise of US shale. So, the US now pictures itself as being the world’s largest oil and gas producer net and is on a brink of opening up oil exports for the first time. And the Saudis and the other Gulf producers are very aware of this.
The difference is that the US has some of the highest production costs onshore in the world. And I don’t think it is so much whether Saudi Arabia and the Gulf states can soak up oil prices below $80 a barrel, I think it is more can the US actually soak up oil prices below $80 a barrel.
Tariq Al-Rifai: I believe that the drop in the oil price today is less about supply and demand fundamentals and more about the finacialization of the commodities markets. We saw that right before the 2008 financial crisis and I think we are seeing against today. However, there are other factors at play, part of which are fundamental – the supply and demand, but more importantly, the time of the price drop suggests to me that the financial players have been pushing down the price.
Would you say that there is an oversupply of oil at this point?
Andrew Critchlow: I think very much so, it is an oversupply of crude. You just have to look at OPEC’s own official figures. They are producing almost a million barrels a day – more than their quota allows for. And I think the fact that the Saudis are discounting their own contracts to Asia, they are talking to the European buyers, Iran and other Gulf states are now doing the same – I think that all points to this environment where you just have too much oil in the market.
Do you think that if Saudi Arabia pursues this policy, it will become a major game changer on the oil market?
Tariq Al-Rifai: Out of all the OPEC countries and out of all the major oil producers around the world they can bear a lower price of oil, other countries, such as Iran, can’t. But more importantly, I think that Saudi Arabia, as well as the OPEC, they are in control of the price of oil as much as the European Central Bank is in control of the European economy. I don’t think they are in control. I do think Saudi Arabia can sustain such a low oil price and I think that they might be interested at this time, but over the long term I don’t think that is sustainable.
I think Saudi Arabia has two motivations for wanting a low oil price. Number one is – they want to make Iran sweat a little bit. Number two – maybe they are a little bit envious of the US shale. The US shale production has really gone up significantly over the past 2 years alone. And if you look at the price of shale, shale is highly dependent on two things: number one – the price of oil being maintained well above $80 a barrel, and number two – the Wall Street banks continuing to finance their activities, because the US shale production requires a lot of resources to continuingly drill a well after a well, after a well. Looking at the price of brent, it is already down 2.5% or more. If it continues a downward spiral and oil will eventually be somewhere in the 70, you will see a lot of the shale players go out of business, or at least stop production.
What could stop the price of oil from falling?
Tariq Al-Rifai: The oil trading market is really a speculators’ market. I think the fundamentals need to show a significant change for the positive, which is an increase in demand. And right now we are not seeing it.
We have the OPEC and we have the countries that are oil producers, but they are not the members of the OPEC. Does that mean that the decisions taken by the OPEC members not affect those who are not the members of this organization and they can do whatever they want?
Andrew Critchlow: Yes, pretty much. And that is really what you’ve seen over the last 20 years. And if you talk to the OPEC, that’s what annoys them perhaps the most. This is a fascinating and very contradictory situation that the US energy policy now finds itself in. Over the last decade they’ve actively promoted the development of shale and they become a major global producer, over 8.6 million barrels a day of liquid petroleum. But with that becomes a market responsibility. You know, America just cannot continue to keep pumping and pumping, and pumping, and yet expect the OPEC, on the other hand, to cut back its production to defend their price level, which ultimately is what makes the production in the US economically viable.
What do you expect from the meeting of OPEC members in November?
Tariq Al-Rifai: I don’t think anything significant is going to come out of it. Who benefits from the low oil price? Saudi Arabia, or even Kuwait and the UAE. They put the shale players in the US and around the world out of business, and when the oil price starts going up again, they are going to be the key beneficiaries, because the shale players won’t be able to come back on line for a couple of years. Who benefits from a high oil price? They are Venezuela and Iran. So, if you look at what the motivations in the OPEC are, I think they are split. So, both objectives cannot be met and I think they will come to a watered down consensus with not much being done on either side.
Andrew Critchlow: I would agree. I think it will be very difficult for them to really agree on anything in the current market environment. But if we get below $70 a barrel, I think all bets are off and it will be very difficult for the more dominant voices in the OPEC, like Saudi Arabia and the UAE, to be able to justify keeping the production at its current level. So, it all depends on where we see oil in the next two-three weeks.