Saudis try to maintain cash flow by pumping more oil

Bloomberg/Fuel Fix:

Saudi Arabia has a response to the global surplus of oil: Raise output to near-record levels and then pump even more.

The world’s biggest oil exporter, having abandoned last year its role of keeping global markets in balance, now has incentive to maximize output and undermine rival producers by using its reserve capacity, according to Citigroup Inc. and UBS AG. Just meeting its own domestic demand this summer will require a lot more fuel, others estimate.

The increase — a snub to fellow OPEC members calling on the kingdom to cut production — will heighten tensions when the organization meets in June. Oil plunged to a six-year low near $45 a barrel in January, six weeks after the Saudis overcame opposition within the group to keep up output despite surging U.S. shale supplies.

“Increasing production and exports is the clear implication of Saudi’s new oil policy,” Seth Kleinman, head of European energy research at Citigroup in London, said by e-mail. “If you want to pressure high cost producers, why hold oil back on spare capacity? Use it all and use it now.”

The biggest member in the Organization of Petroleum Exporting Countries boosted output to 10.1 million barrels a day in March, close to an all-time peak, the International Energy Agency reported on April 15. Saudi Oil Minister Ali Al-Naimi, who has stressed that his country won’t cede market share to higher-cost producers, said in the capital Riyadh on April 7 that production was at 10.3 million barrels and would remain close to that.

The output decision was “forced upon them” by the runaway growth of U.S. shale, which threatened to erode their market share, Yusuf Alireza, chief executive officer of commodity trader Noble Group Ltd., said at a conference in Lausanne, Switzerland, on April 21.
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The shale producers have created a dilemma for the Saudis and OPEC.  If the cartel reduces production to drive up prices it benefits the shale producers who get the benefit of the higher prices without reducing production.  So the Saudis are trying to make up for the reduced price by increasing market share.  This is not good for the long term stability of the cartel and may mean it eventually breaks down.  The low price will result in more marginal wells not being drilled in the US, but it has done little to stop actual production as the shale drillers become more efficient.