Mission & Name
US Foreign Policy (Dr. El-Najjar's Articles)
Saudi Arabia Continues To Turn Screws On U.S.
By James Stafford
Al-Jazeerah, CCUN, May 18, 2015
Saudi Arabia continues to ratchet up production, taking market
share away from U.S. shale producers.
According to OPEC's
latest monthly oil report, Saudi Arabia boosted its oil output to 10.31
million barrels per day in April, a slight increase over the previous
month's total of 10.29 million barrels. That was enough for the de facto
OPEC leader to claim its highest oil production level in more than three
Saudi Arabia has increased production by 700,000 barrels
per day since the fourth quarter of 2014 in an effort maintain market share.
The resulting crash in oil prices is forcing some production out of the
market, and Saudi Arabia intends for the brunt of that to be borne by
There is a lag between movements in the oil price and
corresponding changes in production. OPEC says there was a 23-week time lag
between the fall in rig counts and the resulting dip in oil production in
the United States. But the effects of the oil price crash are now being
felt. New data from the EIA says that U.S. oil production is declining.
Having already predicted a 57,000 barrel-per-day decline for May, the
says that another 86,000 barrels per day in output will vanish in June.
In other words, as Saudi Arabia ramps up, U.S. shale is being forced
to cut back. This story has been told many times over the past few months,
but the data is finally confirming the success of Saudi Arabia's strategy,
albeit a minor one thus far.
But at the same time, Saudi Arabia's
(and OPEC's) influence is much more limited than it was in the past. Despite
Saudi Arabia producing at its highest level in more than 30 years, oil
prices have climbed back from their lows. WTI has jumped more than 36
percent since March, now
trading above $60 per barrel. Brent has surpassed $66 per barrel, up
more than 26 percent in two months. That is obviously good for Saudi Arabia,
but oil prices may not have stayed low enough to do real lasting damage on
The rise in oil prices came despite Saudi Arabia's best
efforts at flooding the market. There are several reasons for this. First,
demand is starting to kick back in, which is soaking up some of that extra
crude flowing around. Refinery throughputs are at three-month high, with 92
percent of refining capacity in use.
A few other contributors to
higher oil prices came in the form of a stronger-than-expected economic
performance in Europe, as well as monetary stimulus in China. Both of those
developments indicate stronger demand for oil in the months ahead. OPEC
forecasts demand for 2015 to rise by 1.18 million barrels per day, an upward
revision from previous estimates, and a higher rate of growth from last
year's 0.96 million-barrel-per-day increase.
Another reason for
higher prices is that the U.S. dollar has weakened a bit, and since oil is
priced in dollars, a weaker dollar translates into higher prices.
Also, on the supply side, until May U.S. producers managed to steadily
increase output, achieving gains in efficiency that kept production flowing
even though rigs fell out of service.
Nevertheless, Saudi Arabia may
still have the upper hand. Oil inventories in the U.S. are still at 80-year
highs, which should keep a lid on prices. That will continue to inflict
damage on U.S. drillers. Several companies have declared
bankruptcy, the latest being American Eagle Energy Corp., a Colorado
driller. More could soon be coming. Some companies have hedged their
production in order to protect themselves from the downside of oil prices.
But as those positions expire, more will become exposed to low oil prices.
OPEC and the International Energy Agency project that
global oil production is still 1.5 million barrels per day higher than
consumption. The glut isn't over yet.
Moreover, hedge funds have
piled into long positions on crude oil. The record level of bullish bets on
oil prices suggests that oil has been pushed higher by speculation. That
means that a correction could push prices back down, as has happened in the
In summary, while foregoing price targets, Saudi Arabia has
managed to maintain its market share throughout the oil bust, with
adjustment coming from higher cost producers. That's exactly what it set out
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