Saudi oil minister ‘not stressed’ as OPEC meet looms

Saudi Arabia’s oil minister has defended his country’s refusal to cut production, arguing that demand for oil is set to increase in the second half of the year.

Speaking to reporters in Vienna late Monday, Ali al-Naimi said, “the answer is yes,” when asked if Saudi Arabia’s strategy of maintaining its production levels in order to retain its global share of the oil market was working.

“Demand is picking up. Good! Supply is slowing, right? That is a fact,” he said ahead of a key meeting of the Organization of Petroleum-Exporting Countries (OPEC) on Friday, according to Reuters.

“You can see that I’m not stressed, I’m happy.”

His comments appear to pour cold water on any expectations that Saudi Arabia — the most influential member of OPEC – is going to call for a cut in the group’s oil production, in a bid to reduce supply and support prices.

Over the last year, the price of benchmark Brent crude has fallen from a high of around $114 a barrel to trade around $65.55 a barrel Tuesday. U.S. crude was trading around $60.97 a barrel.

The decline in prices was driven by an oversupply of oil and lack of global demand, but was exacerbated by OPEC’s decision last November to maintain production at 30 million barrels a day. Many analysts argued that such a move was designed to put pressure on rival U.S. shale oil producers, which face higher production costs.

The stance certainly appears to have borne fruit for OPEC, with rig counts in both the U.S. and Canada falling on the back of oil price declines.

Is demand sustainable?

Some analysts dispute the success of Saudi Arabia’s strategy, however.

“While Middle Eastern OPEC countries have seen exceptional demand for their crude lately, this is not because their strategy of forcing high-cost producers to cut output is working,” Amrita Sen, a commodities specialist at Energy Aspects said in a note Monday.

Indeed, she noted that over the year to date, non-OPEC supplies had risen, year-on-year, by close to 2 million barrels a day.

“What has helped clean up the market somewhat is demand strength, which has surprised everyone including OPEC, together with commercial and strategic petroleum reserve (SPR) stockpiling by China. But China’s storage needs are ultimately finite, and unlikely to last in the same scale much beyond 2016,” she added.

Iran calls for cut

OPEC’s decision to maintain its level of production has not met with universal approval within the 12-member group, however, with members whose economies rely heavily on oil – such as Venezuela and Iran — critical of the approach.

On Monday, a senior Iranian official said a production cut by “countries that have increased their output recently due to the relative absence of Iran and some other member states” would also be discussed at Friday’s meeting, according to Iran’s oil information website, Shana.

The comments indicate Iran’s disquiet at other OPEC members using up its production quota (which had been under-used due to international sanctions on Iran over its disputed nuclear program).

Calls for a production cut have fallen on deaf ears previously, however, and oil analysts aren’t expecting Friday’s meeting to be any different.

“This Friday’s OPEC meeting should be a non-event. We expect Saudi Arabia and OPEC to stay the course and continue their policy of letting prices balance the market from the supply side,” Michael Wittner, global head of oil market research at Societe Generale, said in a note Tuesday.

Unlike al-Naimi’s prediction that demand would increase and supply decrease – factors which would support prices – Wittner argued that oil prices would stay rangebound into the third and fourth quarter of the year.

“Our forecasts, which date back to April, are currently WTI (U.S. crude) $55-59 in the third quarter/fourth quarter and Brent $60-65 in the same period. We note that moderate revisions are possible,” he added.

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Craig Erlam
Based in London, England, Craig Erlam joined OANDA in 2015 as a Market Analyst. With more than five years' experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while conducting macroeconomic commentary. He has been published by The Financial Times, Reuters, the BBC and The Telegraph, and he also appears regularly as a guest commentator on Bloomberg TV, CNBC, FOX Business and BNN. Craig holds a full membership to the Society of Technical Analysts and he is recognized as a Certified Financial Technician by the International Federation of Technical Analysts.