Ali al-Naimi, who was Saudi Arabia's oil minister for more than 20 years, was virtually the face of the oil markets during that time. His ouster over the weekend roiled the oil market.
For many in the industry, al-Naimi represented stability and moderation in the inherently chaotic ebbs and flows of oil markets. The minister championed Saudi interests, but always within an eye to balancing the needs of OPEC producers and the world's consumers.
Nevertheless, change is needed. Saudi oil policy has run off the rails in recent times. In particular, Saudi Arabia's freeze strategy proved ultimately counterproductive. First, in allowing others to propose a freeze to the kingdom, Saudi Arabia essentially ceded the organizing of OPEC to Russia. With the only meaningful spare capacity in the world, Saudi Arabia should never follow, and this time, it did.
Moreover, by allowing expectations of a freeze to drag on, the kingdom encouraged Iran and Iraq to rush new supply to market — and they did — thereby exacerbating exactly the glut which the freeze was supposed to mitigate. Talk of the freeze seems to have faded with higher oil prices, removing this irritant from Saudi policy. Other challenges remain.
First among these, in my opinion, is whether Saudi Arabia wants to be the swing producer or not. Of course, the kingdom has stated that it does not want to balance the market. Were that true, its remaining 2 million barrels per day of spare capacity is superfluous, and the kingdom should either let it erode over time, or bring additional product to market. Personally, I believe the kingdom still sees itself as a pivotal player, albeit with constrained options.
Al-Naimi was correct in not cutting Saudi production in late 2014. Had the kingdom at that time reduced output, the shale players would have taken up the slack, with prices falling nevertheless, but Saudi having less output to show for it.
The incoming oil minister, Khalid al-Falih, is assumed to support continued, gradual supply growth. However, could the kingdom's ambitions grow over time?
Prince Mohammed bin Salman, now assuming effective control over Saudi oil policy, has stated that the country could increase output to 11.5 million barrels a day immediately and go to 12.5 million in six to nine months. The prince has asserted that the kingdom could elect to increase investment in its oil industry and raise production to 20 million barrels a day within a few years.
As ever, having a clear view of Saudi intentions would be enormously helpful to the oil community. An annual increase of 300,000 barrels per day would not greatly influence market expectations of balances and prices. However, were the country to embark on a serious, continued ramping to keep oil prices suppressed and Iran tight on cash, then the entire complexion of the oil business would change.
If the kingdom added 700,000 barrels per day to world supply, OPEC supply growth, when including Iran and Iraq, could be sufficient to cover incremental global demand by itself. In such an event, international oil companies like Shell and BP would be facing hard times indeed. Therefore, one desirable reform would be the clarification of Saudi production intentions. This is unlikely, but it would be helpful.
The kingdom also needs to consider a greater commitment to transparency in oil production, export and storage statistics. Al-Naimi had complained that a production cut wasn't feasible because OPEC members would cheat and compliance could not be assured. If Saudi Arabia has any ambitions of acting as a swing producer in periods of excess supply, data transparency is essential, and not only at the kingdom, but at the major producers — Iran, Iraq, Kuwait, the UAE and Russia — at a minimum.
As the kingdom looks forward to a new oil policy, it needs to regain leadership over OPEC by making a commitment to frankness in communication, greater transparency in reporting, and if at all possible, a clear signaling of its production intentions.
Commentary by Steven Kopits, president and managing director of Princeton Energy Advisors, an oil and gas consulting firm that advises hedge funds and oil equities investors. He previously ran the New York office of Douglas Westwood, energy industry consultants, and earlier worked as an investment banker with Dahlman Rose & Co.
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