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Forget The Tough Talk – Saudi Arabia Is Desperate For A Production Freeze

Forget The Tough Talk – Saudi Arabia Is Desperate For A Production Freeze

At a time when the Saudis are desperately trying to hang on to their dwindling market share, it is intriguing to consider exactly why Russia and the OPEC nations are even discussing an oil production freeze, and what they hope to achieve, knowing that any increase in price will bring back the U.S. shale oil drillers with a vengeance, increasing the supply glut.

But on closer scrutiny, the production freeze seems to be aimed at maintaining the market share of the two larger players, Saudi Arabia and Russia.

Data compiled by FGE energy consultancy suggests that Saudi Arabia is losing its leadership position in 9 out of 15 of its major markets. The competitors eating into the Saudi share include Russia, Iraq, the African suppliers and the United States.

Though Saudi Arabia talked about maintaining market share when prices began to fall in 2014, it later realized that when crude prices are low, competing producers were aggressively entering new markets and the maintaining Saudi market share was tougher than anticipated. Related: U.S. Motorists Burning Through Record Levels of Gasoline

By the end of 2015, Saudi Arabia supplied 8.1 percent of the global oil demand, which is higher than the 2014 figure of 7.9 percent, but still well below its 8.5 percent global market share in 2013.

Saudi Arabia realized that the price war was not helping it to increase its market share, instead, the price was taking a toll on revenue due to plummeting crude oil prices. Ballooning budget deficits, depleting foreign reserves, and the necessity of introducing unpopular measures brought about memories of the Arab Spring.

Similarly, Russia, which is pumping at close to its peak capacity, is worried about losing its market share in Europe to Saudi Arabia.

The other nations participating in the meeting are also pumping near maximum limits. With a production freeze, most nations will retain their existing clients without worrying about losing them to the competitors. Related: Impatient Banks: A Real Red Flag For The Oil Patch

This excludes Iran and Libya, which will not take part in the production freeze talks, as both are in the process of ramping up production.

The last time the Saudi’s opted for a production cut in the 1980s, they achieved nothing other than losing their market share, as none of the other market participants adhered to their production limits. As such, they were wary about any production cuts this time around. But with Russia in the lead, the possibility of the member nations sticking to their production limits is higher.

Thus, when an opportunity arose to freeze production, Saudi Arabia latched onto it in a desperate attempt to maintain market share and bring about some balance in the crude oil market. Related: $50 Oil As Soon As May?

Initially, this all started out as a price war with U.S. shale oil drillers as the Saudi’s feared they would lose their dominant hold over the oil markets. But the outcome was not what the Saudi’s expected. The Saudi’s found themselves isolated with no support from the U.S., fearing alienation if they continued to oppose the majority demand of the OPEC nations to cut production.

During this predicament, the meeting with Russia was a Godsend of which the Saudis are keen to make the most of. Now they are offering their wholehearted support to the production freeze—with or without Iran—and the only thing they have in mind here is safeguarding their market share.

By Rakesh Upadhyay for Oilprice.com

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  • gharrell on March 31 2016 said:
    I hate to state the obvious but every time the Saudis and Russians get together to discuss a production freeze or production anything the price jumps $1 to $3. Since the countries produce 20+ million bbls a day that's a quick $20 million to $60 million dollars in their pocket every time they meet or talk. Expect a lot more "meetings" in the future. I hope they shut the doors tight as to dampen the sound of laughter. There will be no fundamental price change until the storage issue is brought back inline with historical levels. In the mean time I hope they "meet" many more times as it puts money in all operators pockets or at least until the media and market managers realize .............
  • GeorgeC on April 01 2016 said:
    The Saudis are entering desperate times, they have a perfect storm brewing. In 2012, in response to the Arab Spring, demonstrations demanding reform were held. The king responded by generously spend hundreds of billions of dollars in social welfare programs. Iran, its main rival, has returned to the international stage after making nice with the US and European powers, and is vowing to take market share, most likely aiming at the Saudis. This return of Iran has shaken both Israeli and Saudi relationships with the US in an unprecedented manner. Saudi is fighting proxy wars with Houthi militants in Yemen, and is lost int he Syrian conflict. With the advent of the Arab Spring and social media and internet news, there is a newly forming, educated, liberal class that are beginning to demand social, economic and religious reforms. The royal families response has been to hand out stiff prison sentences to liberals, dramatically increase executions, step up military efforts in Yemen, and cut social welfare programs. Smells like revolution is in the air. Their only hope is to cut production without losing market share, which means making a deal with Russia. This will take time though. Until then, times will be tough in the Kingdom, and political instability is a real threat. If something isn't done quickly to modernize the monarchy to something like the Qatar or the Emirates, my prediction is more instability followed by a palace coup.
  • Steve K on April 01 2016 said:
    Elsewhere this week it was reported that Saudi Arabia and Kuwait have agreed to restart production at the Khafji oilfield in the neutral territory between the two countries. Hardly the action of a country wanting a production freeze.
  • Zorro6204 on April 03 2016 said:
    "Now they are offering their wholehearted support to the production freeze—with or without Iran"

    Uhhhhh . . . or not.
  • Aceibis on April 04 2016 said:
    There seems to be more chatter then usual leading up to a meeting between sovereign producers. Not sure what folks are looking for. The current price is just about where Saudi would like to see it. Even the $40-50 would be better. A freeze of some kind may lift prices into this range for the short to medium term. The danger is price may go higher, which is not good. My guess is nothing of substance will occur, and only sentiment will be left to move price a dollar here a dollar there.
  • jerzy wasiewicz on April 06 2016 said:
    USA should put oil embargo on Saudis until they stop supporting terrorism around the world

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