New US crude inventory figures sent the oil market into a spin last week as it showed the first signs of instability since Opec and non-Opec producers agreed to cut production to support the market.
Brent had stabilised in a range of $54-58 a barrel in the months since early December but dropped over 5 per cent on 8 March. During Asia hours on 13 March, Brent was trading at about $51 a barrel, while WTI was below $50.
The price drop was largely attributed to new data showing US stockpiles had increased for a ninth consecutive month to a record 528 million barrels. Meanwhile the Washington-based Energy Information Administration (EIA) increased its forecast for US crude production, seeing shale oil drive overall output to an all-time high of over 9.7 million barrels a day (b/d) in 2018.
The resurgent US shale oil sector puts Saudi Arabia in a difficult position. The worlds largest crude exporter had put off intervening in the market for two years since oil prices feel from $100-plus highs and the agreed Opec/non-Opec cuts seemed to provide a solution to rebalance the market.
Riyadh will be the driving force behind any negotiations to extend the production cuts into the second half of 2017 but Energy Minister Khalid al-Falih said in Houston last week that there would be no free rides for non-Opec producers benefiting from lower Saudi supply.
This appeared to be aimed at both the US shale sector, but also Russia, which is the dominant non-Opec producer agreeing to cut production. While compliance to the agreed cuts has been high within Opec, there are question marks over Russias commitment in the first two months.
There is little chance that Riyadh will extend the cuts without reassurance from Russia. Divides within Opec could also emerge as both Iraq and Iran have indicated they are ready to ramp up output in the second half of the year.
Without the tools to intervene in the market to boost prices, Saudi Arabia may revert to its 2014-2016 strategy to boost production and retain market share.
This previous strategy was intended to damage higher-cost non-Opec producers including US shale oil. But rapid advances in technology have seen in the US unconventional oil sector emerge much more resilient to lower oil prices than anyone expected.
The increased flexibility of US production has left Riyadh back to where it was in late 2014, and the Saudi leadership will face tough decisions as the six-month agreement draws to a close in June.