According to Reuters, Saudi Arabia is private communicating with other OPEC members that they do not object to lower oil prices for an extended period, and do not intend to make significant production cuts in the near future. Sources indicate this about face in Saudi policy is designed to slow down the expansion of rival producers including the revived U.S. oil industry.
A number of OPEC members such as Venezuela have been pushing for immediate production cuts to drive oil prices back up to around $100 a barrel. Saudi officials are, however, sending a different message in private meetings with investors and analysts recently. Participants in these meetings say OPEC’s largest producer is ready to accept oil prices down to $90 per barrel, and even as low $80, for a year or longer.
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All about market share
This news provides the clearest sign yet that Saudi Arabia is moving on from its longstanding strategy of holding oil prices at around $100 a barrel (Brent crude price) in order to retain market share for years to come.
Riyadh is apparently wagering that a period of lower prices – which will inevitably damage the finances of some members of OPEC – is the best method to assure higher revenues over the medium term. The idea is to reduce new investment and more oil supply from places like the U.S. shale patch or deepwater rigs, according to the unnamed Reuters sources.
No production cuts means lower oil prices for a while
When asked recently regarding the possibility of cuts in Saudi output, one Saudi official responded, “What cuts?”, according to one of the sources.
Analysts are also unsure whether the new Saudi position is something the kingdom is committed to, or more of a a talking point to try and encourage OPEC members to work with the Saudi’s to reduce the global oil supply.
One source noted he believes that Saudi Arabia does not necessarily want prices to slide further, but doesn’t want to take on production cuts by itself, and will live with lower prices until other OPEC nations commit to cuts.