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The International Energy Agency Thursday said a sharp drop in the global supply surplus by the end of the year should push the market toward balance.
Saudi Arabia sent a powerful message last weekend when longtime Oil Minister Ali al-Naimi, 81, was removed by royal decree and replaced with former Saudi Aramco CEO Khalid al-Falih, viewed as a capable technocrat who will reflect the views of Saudi Deputy Crown Prince Mohammed bin Salman. The deputy crown prince has released his "Vision 2030" plan for economic reform, and Saudi Aramco's public offering next year is a centerpiece of that plan.
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Favorite son of King Salman, bin Salman is responsible for the military and the overall economy, a large part of which is the oil industry. His plan is to monetize the oil sector to invest in other areas and diversify the Saudi economy. He wants to build a $2 trillion sovereign wealth fund that would dwarf others.
Al-Naimi, 21 years in his role, was long the face of Saudi oil and represented the kingdom's position as master swing producer and the lead player in OPEC. Saudi Arabia, however, already stepped away from that role when it pushed the cartel to let market forces set prices in November 2014, instead of by adjusting production.
That policy crushed crude prices and resulted in the shakeout of high-cost producers. For one, the U.S. shale industry has been seriously wounded, and analysts expect that will continue with more production shutdowns and bankruptcies possible. The U.S. is producing about 500,000 barrels a day less than it was a year ago.
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Analysts see the "rebalancing" of the oil market leading to a higher crude price by the end of the year, even if there is another period of decline before that. One of the factors influencing the market on the supply side has been the return of Iranian oil to the market, and also the fact that Russia and Saudi Arabia have continued to produce at high levels even in a low-price environment.
However, there also have been unforeseen outages in Nigeria, Libya and even in Canada, where forest fires are temporarily disrupting as much as a million barrels a day of production.
"It's a paradox. On the one hand, there's continuing oversupply in the market, and on the other hand, it's a rather tight market. There are pockets of disruption all around the world, and of course the potential big one is Venezuela," said Daniel Yergin, vice chairman of IHS. Venezuela's production appears to be eroding as it faces political instability and economic upheaval.
"Our expectation for the second half of the year is that prices will sort of orbit around $50 a barrel," Yergin said. IHS had previously expected a $48 price for Brent.
The outages equaled about 2.5 million to 2.7 million barrels a day, according to Michael Cohen, head of energy commodities research at Barclays. Cohen last week raised his forecast for oil prices to $44 per barrel for Brent this year, an increase of $5 because of the rebalancing of the market.
However, he says if the wall of oil that's offline comes back online quickly it could mean a period of lower prices before crude moves higher to the low $50s in the fourth quarter.
The IEA said Thursday that Iran's production has been greater than expected and has helped offet the oil lost from outages.
As for the Saudis, bin Salman recently said the kingdom could ramp up production by about a million barrels a day to 11.5 million immediately, and it could also get to 12.5 million barrels a day in the next six to 12 months, if it wants to.
Bin Salman also said in an interview with Bloomberg that Saudi Arabia could increase to a maximum of 20 million barrels a day if it invested in its industry. The IEA Thursday said Saudi Arabia could increase production towards 11 million, "without strain" from its current 10.2 million barrels per day.
Yergin pointed out that one of the first comments made by al-Falih after his appointment was that Saudi Arabia intends to continue supplying current customers and increasing volumes of oil to the markets.
"They're really going to let the market drive things, and their great advantage is they are the low-cost producer of great scale," he said. "I think the days of cutting back production and the coordination with other producers, those days are over."
"The last thing they want to do is throttle back production and make room for other producers and in particular they don't want to make room for Iran," said Yergin.
Citigroup analysts said al-Falih's speeches are in line with the Saudi government's policy to increase market share. The analysts, in a note, said there's little chance Saudi Arabia would agree to a production freeze at the upcoming OPEC meeting June 2 or anytime soon.
"Rather what can be expected is fulfilling the logic of running an oil company. That means continuing if not accelerating the strategy he started while Aramco CEO. This would involve increasing international and domestic downstream investments, assuring a growing market share based on growth of the country's production capacity, based on its vast reserves," they wrote.
Accordingly, there should be a clear push by Saudi Arabia for higher production and exports in coming months and years, the Citi analysts said. They are also watching for signs of any increased downstream investments or expanded drilling within the kingdom.
On Tuesday, Amin Nasser, CEO of Saudi Aramco, said at a news briefing that the company is likely to boost its production this year to meet rising demand. "We're seeing a global increase in demand," Nasser said. "We are meeting that call on us."
It's not clear, however, how much Saudi Arabia will increase production.