The high cost of Saudi Arabia's market share strategy

Bloomberg/Fuel Fix:

Saudi Arabia has been fighting with fellow OPEC members since the oil rout started two years ago. For the first time next week, it can argue convincingly that its strategy of squeezing rival producers is succeeding.

By stifling high-cost suppliers, the Saudi approach has now almost eradicated the global oversupply, spurring a price rally of 80 percent since January. All but one of 27 analysts surveyed by Bloomberg said the Organization of Petroleum Exporting Countries will stick with the strategy rather than set output limits when ministers gather in Vienna on June 2.

Lower prices have taken their toll on production from the U.S. to Nigeria. Analysts from the International Energy Agency to Goldman Sachs Group Inc. say the crude glut is dissipating as supply and demand move back into balance. That shift may mean a less contentious meeting than the last gathering in December, which ended with public criticism of Saudi Arabia’s position from fellow members Venezuela and Iran.

Oil production outside OPEC is headed this year for its biggest drop since 1992 as the U.S. shale-oil boom that fostered the world surplus sputters out, the Paris-based IEA forecasts. U.S. output has fallen for 11 weeks to its lowest since September 2014, and will average 8.5 percent lower this year than 2015, the Energy Information Administration estimates. Kuwait’s acting oil minister Anas Al-Saleh, said on May 18 that OPEC’s policy “has been working well.”

Any action that raises prices would only rescue U.S. drillers and jeopardize the return to equilibrium, said Mike Wittner, head of oil market research at Societe Generale SA in New York

“The Saudis might be concerned that if prices go a little higher and sustain it, that could nip the re-balancing in the bud just when it’s getting going,” said Wittner. “I don’t know they have a whole lot of incentive to particularly do anything.”
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This seems overly optimistic about the Saudi strategy and its effects onnshae drillers.  Where the low price strategy  ahs done the most damage isto new offshore projects and to OPEC member states in general who are still hemoraging red ink.  The Saudis are not immune from this problem.  They ahve been burning through their own reserves as have the Russians.

Meanwhile, the shale producers are finding ways to become more efficient and make a profit with low price oil.  What the Saudi and OPEC strategy has accomplished is put a ceiling on their own ability to manipulate the price and make a profit.