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  Business   Saudis end supply-driven oil price

Saudis end supply-driven oil price

REUTERS
Published : May 6, 2016, 11:46 pm IST
Updated : May 6, 2016, 11:46 pm IST

As Opec officials gathered this week to formulate a long-term strategy, few in the room expected the discussions would end without a clash.

As Opec officials gathered this week to formulate a long-term strategy, few in the room expected the discussions would end without a clash. But even the most jaded delegates got more than they had bargained with.

“Opec is dead,” declared one frustrated official, according to two sources who were present or briefed about the Vienna meeting.

This was far from the first time that Opec’s demise has been proclaimed in its 56-year history, and the oil exporters’ group itself may yet enjoy a long life in the era of cheap crude.

Saudi Arabia, Opec’s most powerful member, still maintains that collective action by all producers is the best solution for an oil market that has dived since mid-2014.

But events at Monday’s meeting of Opec governors suggest that if Saudi Arabia gets its way, then one of the group’s central strategies — of managing global oil prices by regulating supply — will indeed go to the grave.

In a major shift in thinking, Riyadh now believes that targetting prices has become pointless as the weak global market reflects structural changes rather than any temporary trend.

Opec is already split over how to respond to cheap oil. The differences resurfaced at the long-term strategy meeting of the Opec governors, officials who report to their countries’ oil ministers.

According to the sources, it was a delegate from a non-Gulf Arab country who pronounced Opec dead in remarks directed at the Saudi representative as they argued over whether the group should keep targeting prices.

But Saudi governor Mohammed al-Madi said he believed the world has changed so much in the past few years that it has become a futile exercise to try to do so, sources say.

Dispensing with price targets represents a massive change in Saudi thinking. This is now being driven largely by 31-year-old deputy Crown Prince Mohammed bin Salman, who took over as the ultimate decision maker of the country’s energy last year.

When oil was viewed as scarce, the kingdom thought it had to maximise its long-term revenues even if that meant pumping fewer barrels and yielding market share to rival producers, according to several sources familiar with the Saudi thinking.

With the importance of oil declining, Riyadh has decided it is wiser to prioritise market share, the sources say.

It believes it will be better off producing more at today’s low prices than reducing output, only to sell the oil for even less in the future as global demand ebbs.

Location: United Arab Emirates, Dubai