| LONDON/NEW YORK
LONDON/NEW YORK Oct 12 Saudi Arabia is quietly
telling oil market participants that Riyadh is comfortable with
markedly lower oil prices for an extended period, a sharp shift
in policy that may be aimed at slowing the expansion of rival
producers including those in the U.S. shale patch.
Some OPEC members including Venezuela are clamoring for
urgent production cuts to push global oil prices back up above
$100 a barrel. But Saudi officials have telegraphed a different
message in private meetings with oil market investors and
analysts recently: the kingdom, OPEC's largest producer, is
ready to accept oil prices below $90 per barrel, and perhaps
down to $80, for as long as a year or two, according to people
who have been briefed on the recent conversations.
The discussions, some of which took place in New York over
the past week, offer the clearest sign yet that the kingdom is
setting aside its longstanding de facto strategy of holding
prices at around $100 a barrel for Brent crude in favor
of retaining market share in years to come.
The Saudis now appear to be betting that a period of lower
prices - which could strain the finances of some members of the
Organization of the Petroleum Exporting Countries - will be
necessary to pave the way for higher revenue in the medium term,
by curbing new investment and further increases in supply from
places like the U.S. shale patch or ultra-deepwater, according
to the sources, who declined to be identified due to the private
nature of the discussions.
The conversations with Saudi officials did not offer any
specific guidance on whether - or by how much - the kingdom
might agree to cut output, a move many analysts are expecting in
order to shore up a global market that is producing
substantially more crude than it can consume. Saudi pumps around
a third of OPEC's oil, or some 9.7 million barrels a day.
Asked about coming Saudi output curbs, one Saudi official
responded "What cuts?", according to one of the sources.
Also uncertain is whether the Saudi briefings to oil market
observers represent a new tack it is committed to, or a talking
point meant to cajole other OPEC members to join Riyadh in
eventually tightening the taps on supply.
One source not directly involved in the discussions said the
kingdom does not necessarily want prices to slide further, but
is unwilling to shoulder production cuts unilaterally and is
prepared to tolerate lower prices until others in OPEC commit to
With most other members of the cartel unable or unwilling to
reduce their own output, the group's next meeting on Nov. 27 is
set to be its most difficult in years. OPEC has agreed to cut
production only a handful of times in the past decade, most
recently in the aftermath of the 2008 financial crisis.
On Friday, Venezuela - one of the cartel's most
price-sensitive members - became the first to call openly for
emergency action even earlier. Foreign Minister Rafael Ramirez
said "it doesn't suit anyone to have a price war, for the price
to fall below $100 a barrel."
On Sunday, Ali al-Omair, oil minister of Saudi Arabia's core
Gulf ally Kuwait, appeared to be the first to articulate the
emerging view of OPEC's most influential member, saying output
cuts would do little to prop up prices in the face of rising
production from Russia and the United States.
"I don't think today there is a chance that (OPEC) countries
would reduce their production," state news agency KUNA quoted
him as saying.
Omair said that prices should stop falling at around $76 to
$77 a barrel, citing production costs in places like the United
States, where a shale oil boom has unexpectedly reversed
dwindling output and pushed production to its highest level
since the 1980s.
Saudi oil officials have made no public comments on the
deepening swoon in markets. Senior officials did not reply to
questions from Reuters about recent briefings.
DON'T BE SURPRISED BELOW $90
Global benchmark Brent crude oil futures have fallen
steadily for almost four months, dropping 23 percent from a June
high of over $115 a barrel as fears of a Mideast supply
disruption ebbed, U.S. shale production boomed and demand from
Europe and China showed signs of flagging.
Until recently, Gulf OPEC members have been saying that the
price dip was a temporary phenomenon, betting on seasonal demand
in winter to prop up prices. But a growing number of oil
analysts now see the latest slide as something more than a
seasonal downswing; some say it is the start of a pivotal shift
to a prolonged period of relative abundance.
Rather than fight the decline in prices and cede market
share in the face of growing competition, Saudi Arabia appears
to be preparing traders for a sea change in prices.
The Saudis want the world to know that "nobody should be
surprised" with oil under $90 a barrel, according to one of the
people. Another source suggested that $80 a barrel may now be an
acceptable floor for the kingdom, although several other
analysts said that figure seemed too low. Brent has averaged
around $103 since 2010, trading mostly between $100 and $120.
While the latest discussions are the bluntest efforts yet to
signal the shift in Saudi strategy, early signs had already
begun sending shivers through the oil market. In early October
the kingdom cut its official selling prices more sharply than
expected in a bid to maintain customers in Asia, widely seen as
the opening shots in a price war for Asian customers.
"Riyadh's political floor on oil prices is weakening,"
Robert McNally, a White House adviser to former President George
W. Bush and president of the Rapidan Group energy consultancy,
wrote in a note to clients following a trip to Saudi last month.
McNally said he is not aware of any specific Saudi price or
timing strategy, but told Reuters that Saudi Arabia "will accept
a price decline necessary to sweat whatever supply cuts are
needed to balance the market out of the U.S. shale oil sector."
As that message began to dawn last week, the price rout
quickened, with Brent lurching to its lowest level since 2010.
"Until about three days ago the absolute and total consensus
in the market was the Saudis would cut," said McNally. That is
no longer a foregone conclusion, he said. "The market suddenly
realizes it is operating without a net."
(Additional reporting by Rania el Gamal in Dubai and Timothy
Gardner in Washington; editing by Jonathan Leff and Matthew