This week started badly for oil prices, and the chief culprit seems to be Saudi Arabia and its drive to produce more and more oil.
Brent crude, the European benchmark from the North Sea, fell below $55 per barrel on March 23 in London, while WTI, the American light, sweet crude dropped under $46 per barrel in New York.
This was no coincidence. The day before, Saudi Oil Minister Ali al-Naimi said his country was now producing about 10 million barrels of crude per day, the most since July when an oil glut more than halved the price of oil from an average of more than $110 per barrel.
Related: Oil Price Speed Limit Presaging An Age Of Austerity?
Part of the reason for the plunge in prices was the virtual flood of oil from the boom in US shale production. As prices kept falling, OPEC was urged to cut production at its November meeting in Vienna to shore them up. But under Saudi leadership the cartel decided to keep its combined production limits at what are now 4-year-old levels of 30 million barrels a day.
At first al-Naimi didn’t explain his strategy, but in January he said the reason was to regain market share from the US shale drillers and others who were contributing to the oversupply of oil. At a conference in Riyadh on March 22, he said the cartel would have lost even more market share if it had decided to cut production at the November meeting.
“Saudi Arabia cut output in 1980s to support prices. I was responsible for production at [the state-owned energy company Saudi Aramco] at that time, and I saw how prices fell, so we lost on output and on prices at the same time,” al-Naimi said. “We learned from that mistake.”
Related: Wall Street Losing Millions From Bad Energy Loans
Saudi production wasn’t the only driver of the poor start to the week for oil prices. Negotiations are reportedly proceeding smoothly between Iran and the five permanent members of the UN Security Council – Britain, China, France, Russia and the United States – plus Germany over Tehran’s nuclear program.
If a deal with Iran is reached by the end of March, Iran’s oil exports could rise, further depressing oil prices.
And oil investors are carefully watching the number of drilling rigs in operation in the United States to gauge a rise or fall in the country’s oil supply. Since Jan. 1, the rig count has dropped by more than 40 percent, according to the oilfield-services company Baker Hughes, which carefully follows such trends.
Related: Natural Gas Prices To Crash Unless Rig Count Falls Fast
Still, the actual number of rigs doesn’t always reflect the level of oil production. Despite the drop in rigs so far this year, output in America is robust at 9.4 million barrels a day.
Appearing at the same conference with al-Naimi on March 22, Ali al-Omair, Kuwait’s oil minister, said the most promising solution would be for non-OPEC countries to agree with members of the cartel to cut production universally. In fact, Algeria is already acting on that idea.
Al-Omair pointed to remarks by Algerian Energy Minister Youcef Yousfi, who said March 16 that the government of President Abdelaziz Bouteflika is working to organize a global response to the drop in oil prices from countries that aren’t members of OPEC. Al-Omair said the fall in oil prices hurts the economies of all oil-producing countries, not just members of the cartel.
By Andy Tully of Oilprice.com
More Top Reads From Oilprice.com:
Andy Tully is a veteran news reporter who is now the news editor for Oilprice.com