Riyadh's quest to maintain oil supremacy

30 June 2015

High production is Saudi Arabia playing to its strengths and nothing more

Since Saudi Arabia implemented its high production strategy to maximise market share in late 2014, Riyadh has come under fire from all quarters, especially markets most affected by the move.

The US media has been quick to point out that Riyadh is burning through its foreign reserves and that keeping prices low in the long term is a completely unsustainable position.

Others have been quick to point the finger accusing Riyadh of using oil as a weapon to punish Iran or to steal customers with good long-term supply deals.

Like anything in the oil business the truth is rather more nuanced and takes an objective viewpoint to try to add some perspective to a complicated and fractured narrative.

The most important fact is that no one, not even Saudi Arabia, can accurately predict the future oil price. There are simply far too many variables that come into play to be able to give an accurate reading for a prolonged period.

In January 2011, there was calm and peace across the vast majority of the Middle East and an abundance of US shale gas, but very little shale oil.

Within a year, wars had broken out across the region, oil was $110 a barrel and US producers were beginning to pump serious amounts of shale oil. High oil prices then acted as the perfect incubator to nurture the US shale sector to the extent that within three years production had hit 5 million barrels a day (b/d).

Not even shale oil’s most vocal champions predicted such a success, and, in the same way, no one predicted oil prices falling to $50 a barrel in the second half of 2014.

All Riyadh can do is use the tools at its disposal to ensure it defends its position as the world’s largest oil exporter and if this means pumping more than 10 million b/d to try to maintain its market share, then so be it.

Todays splintered oil market has a definite air of volatility and unpredictability, and producers need to realise that pointing the finger at Saudi Arabia is not going to help them.

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