How Saudi Arabia plans to end the oil glut

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RIYADH — The world’s top oil exporter Saudi Arabia is determined to reduce inventories further through an OPEC-led deal to cut crude output and raised the prospect of prolonged restraint once the pact ends to prevent a build up in excess supplies.

Saudi Energy Minister Khalid al-Falih, speaking during an investment conference in Riyadh, said on Tuesday the focus remained on reducing the level of oil stocks in OECD industrialized countries to their five-year average.

The Organization of the Petroleum Exporting Countries, plus Russia and nine other producers, have cut oil output by about 1.8 million barrels per day (bpd) since January. The pact runs to March 2018, but they are considering extending it.

“We are very flexible, we are keeping our options open. We are determined to do whatever it takes to bring global inventories down to the normal level which we say is the five-year average,” Falih told Reuters.

The market has been concerned that, once the supply cut deal comes to an end, producers will ramp up supplies again, causing prices to fall. But Falih raised the prospect of continued output restraint to prevent this.

“When we get closer to that (five-year average) we will decide how we smoothly exit the current arrangement, maybe go to a different arrangement to keep supply and demand closely balanced so we don’t have a return to higher inventories.”

The oil price has recovered from below US$30 a barrel at the start of 2016 to trade above US$57 on Tuesday, and rose after Falih’s comments. Oil remains, however, at half its price in mid-2014.

Reuters reported last week, citing OPEC sources, that producers were leaning towards extending the deal for nine months, although any decision could be postponed until early next year depending on the market.

Falih did not comment on an extension but said the cuts had reduced the supply overhang in storage by half.

“We have reduced the inventories by over 180 million barrels and we still have about 160 million barrels according to numbers I have seen last,” he told Reuters.

“The intent is to keep our hands on the wheel between now and until we get to a balanced market and beyond, we are not going to do anything that is going to disrupt the path we are on,” he added.

Falih said oil investment had returned after the OPEC-led pact began at the start of the year and helped by a global economic recovery.

The minister said there was consensus to continue the cuts until targets were reached to balance the market but said shocks to the market by reducing more than needed should be avoided.

Thomson Reuters 2017

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