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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Uhhhhh . . . or not.