The oil price collapse in mid-June 2014 turned attention of the global energy markets to Saudi Arabia in anticipation of the Kingdom’s immediate response. The country‘s intrinsic role in oil market clearing is linked to its ability to alter production levels at will and to the status of Saudi Arabia as OPEC’s swing producer.
There were two options at the Kingdom’s disposal. First, cutting the output to bring oil prices back to $100 per barrel and enjoying higher export revenues thereafter. Second, adjusting the output to maintain market share in the world’s markets and accepting the lower-price environment. The latter course of action was perceived as opening a fight against the unconventional industry, in particular the U.S. shale producers. Saudi Prince Alwaleed Bin Talal, chairman of the Kingdom Holding Company, was amongst the first to publicly warn against the shale threat and formally relayed the issue in a letter addressed to the Minister of Petroleum and Natural Resources Al-Naimi as early as May 2013.
In line with the warning and facing a market share decline, in November 2013 AlNaimi pressured the OPEC members against any output reduction with an implicit aim to depress oil prices and undermine shale profitability (Reuters). Since then the strategy to defend market share was repeatedly chosen over revenue maximisation (Figures 1 and 2) but the Minister has now taken a more moderate view on the shale-related vulnerability. The opinion reversal of Al-Naimi is demonstrated by considering the U.S. shale as “a welcome development for world oil markets” and expressing a belief that “there is room for all producers”. However, both statements are based on the assumption of growing global demand for energy in the near future.
The full article, along with all maps and graphs, is available in Issue 2 of Shale Gas International Magazine and can be found on page 6.