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Defending oil market share still ‘pre-eminent’ for Saudis, IHS' Yergin says

Saudi Arabia is still preoccupied with defending its market share even though its oil minister said producers may discuss taking action to prop up crude prices next month, analyst Dan Yergin said Friday.

Oil markets rallied Thursday on Energy Minister Khalid al-Falih's comments.

Analysts have said Saudi Arabia could play ball with other producers despite rejecting an agreement to freeze output in April after regional rival Iran said it would keep pumping until it returned to pre-sanctions production levels.

That is because the Saudis now have a larger stake in the long-term oil price as Prince Mohammed bin Salman seeks to diversify the economy by launching an IPO for a stake in state oil giant Saudi Aramco and turning the country's Public Investment Fund into a $2 trillion sovereign wealth fund.

Al-Falih confirmed that producers will gather on the sidelines of a meeting in Algeria next month to discuss the rebalancing of oil markets following a two-year rout that has seen crude prices plummet from more than $100 a barrel in 2014 to the upper $20s this past winter.

But Yergin said protecting Saudi share of the oil market still trumps propping up prices in the eyes of the kingdom's policymakers. Indeed, in OPEC's latest monthly report out earlier this week, Saudi Arabia reported it was pumping crude at record levels.

"I think the pre-eminent thing is about maintaining market share," Yergin told CNBC's "Squawk Box."

Saudi Arabia's new Energy minister Khalid Al-Falih
Fayez Nureldine | AFP | Getty Images
Saudi Arabia's new Energy minister Khalid Al-Falih

Still, he added, energy-producing nations may be able to come to an agreement as they reach the upward limits of their capacity to churn out crude. Still, while Iran is nearing capacity, striking a deal will be difficult, said Yergin, IHS Markit vice chairman.

Oil markets are moving into recovery phase as U.S. producers have decreased production by about 1.2 million barrels per day from a modern-day peak in April 2015, Yergin said. The Saudi-engineered policy of maintaining high production has squeezed American drillers whose costs are higher due to their reliance on hydraulic fracturing, the process of pummeling shale rock with water, minerals and chemicals to free oil and natural gas.

While commodity watchers have focused on the response from U.S. shale producers as they await signs of market balance, Yergin cautioned that the postponement of "big, megaprojects" around the world that typically take five to seven years to complete is jeopardizing the industry's ability to meet future demand.

"You see postponements, delays and cancellations, so you're going to see as supply-demand balance that's going to be different over the next couple of years," he said. "The question now is of course struggling with price, but in three, four, five years, how are we going to meet 5 or 6 million barrels a day of new demand growth?"