Why Saudi Arabia didn’t need a Doha deal


Saudi Arabia’s Oil Minister Ali al-Naimi

The failure of the OPEC/non-OPEC producers’ meeting in Doha was principally because Saudi Arabia is winning the market share war and didn’t need a deal.

World oil prices fell sharply after the meeting ended and are still well below marginal cost for many producers. But they were on 18 April more than 60 per cent higher than on 20 January.

Lower prices have stimulated demand and countered the impact of slower growth in China. It grew by 1.8 per cent last year and is forecast to expand by 1.3 per cent in 2016.

Non-OPEC oil supply growth, which soared in 2013-15, has been halted. The consensus is that it non-oil output will be down by at least 700,000 b/d this year.

In contrast, the production of the six Gulf OPEC states averaged 24.82m b/d in the first quarter of 2016. This was about 2.5m b/d higher than their combined output in the same period of 2015.

The most telling fact is that investment in upstream development outside the Middle East has collapsed. At the end of March, the number of rigs operating other than in the region totalled 1,154, almost half the number recorded at the same point in 2015. The US rig count is now 25 per cent of its peak in the autumn of 2014. The Middle East rig count, in contrast, was down by just 10 to 397.

The price slump that started in the summer of 2014 is the sharpest in absolute terms in the history of oil. It’s racked the global oil industry, sent some oil exporters close to bankruptcy and raised questions about the sustainability of Saudi Arabia economy.

But the decision to let the market deal with soaring non-OPEC output rather than going for a quick price fix is beginning to pay off for Saudi Arabia, the principal champion of the strategy. On present trends, world oil prices could be above $60 barrel by the end of the year. Saudi Arabia will also have increased its share of world oil markets and defended its stake in global oil trade.

Meanwhile, the kingdom is stepping up investment to maintain its sustainable oil production at 12m b/d, double non-associated gas output by the start of next decade and radically increase domestic refined product output. It has started developing shale gas capacity.

All this is setting the scene for the conversion of Saudi Aramco or Saudi Aramco subsidiaries into joint stock corporations listed on the local stock market. Deputy Crown Prince Mohammed Bin Salman says this could happen next year. At a stroke, Saudi Aramco will become the world’s most valuable quoted company.

It will signal the start of a new era for oil which will be dominated by the national oil and gas companies of the Middle East. The prize is enormous and Saudi Arabia has once more demonstrated it is prepared to pay the price involved in securing it.