Saudi minister not promising more oil
JOHN KEMPSaudi Oil Minister Ali al-Naimi repeated previous criticisms about how traders and the media misunderstand the oil market and the country’s policies, but made no promise of an immediate output increase in an opinion article for the Financial Times last week.
Naimi wrote bluntly that “there is no rational reason for high oil prices.” Instead he argued “fundamentally the market remains balanced. It is the perceived shortage of oil keeping prices high – not the reality on the ground. There is no lack of supply. There is no demand which cannot be met.”
The kingdom “would like to see a lower price,” wrote Naimi, which goes slightly further than previous statements issued by Saudi officials recently, but not much.
Turning to the question of what the kingdom could actually do, Naimi emphasized: “We want to correct the myth that there is, or could be a shortage. It is an irrational fear, a fear without basis.” He made no mention of extra barrels in the short term.
In previous price surges, jawboning by the kingdom proved to a substitute rather than a prelude to action, or action only came much later.
The problem for the Saudis, however, is that it is not obvious that there is much they can do.
If the kingdom boosted exports, for example by cutting its official selling prices and offering significant discounts to encourage buyers to take more barrels, it could raise global inventories.
Oil bears could point to rising output and stocks. But bulls would simply switch the focus to the shrinking margin of spare capacity. Every barrel of increased output reduces Saudi Arabia’s spare capacity by an equivalent amount.
Saudi Arabia can control actual barrels, but its grip on perceptions is much shakier.
If Saudi oil officials sometimes sound irritated when asked about the kingdom’s strategy on prices, it is because they are being asked to take responsibility for something they do not fully control.
Reading Naimi’s editorial, the question is whether it presages a higher level of concern than usual, and whether it is a prelude to the kingdom boosting production or not. Is it a final warning before the kingdom opens the taps, or an empty exercise?
The other question is how Saudi Arabia’s evident desire to see lower prices intersects with reports that the United States, the United Kingdom and France are discussing the possible release of strategic stocks.
To have a meaningful chance of changing perceptions and the trajectory of oil prices, policy-makers would need to deploy some form of “shock and awe” (to use the military term) or a “big bazooka” (to use the one popular in central banking).
The only thing worse than not acting would be to take policy measures that fail for being too small.
So a stock release would need to be large. To be certain of an impact, a release might need to exceed 60 million barrels, though there are restrictions on how much the U.S. president can release on his own, and some other International Energy Agency (IEA) members are extremely unenthusiastic about releasing stocks at this point.
The key question is whether stock releases by IEA member countries could be coupled with an increase in Saudi output in a bid to flood the market and push prices lower.
It is not clear whether the U.S. and its IEA allies could reach a deal with Saudi Arabia on this sort of coordinated strategy.
Saudi Arabia is not enthusiastic about efforts to manipulate oil market volumes to move prices, and even less enthusiastic about consumer-country interference. But if the Saudis are serious about wanting lower prices, they might have to contemplate this option.
Naimi may be right that prices are too high, perhaps damagingly so for the global economy, but others would disagree, and who said the market had to be fully rational?
The practically non-existent reaction to publication of an opinion article by the most powerful oil supplier in the world suggests most traders think he can’t or won’t do much more.
John Kemp is a Reuters financial columnist that specializes in commodities and energy. This abridged column was originally released by Reuters on March 28.