Oil prices up as Saudis see rising demand, slowing supply

Saudi Arabia's oil minister arrived in Vienna Monday for a semi-annual Organization of Petroleum Exporting Countries meeting, and expressed optimism that the cartel's strategy of maintaining output is working.

Leonhard Foeger/Reuters
Saudi Arabian Oil Minister Ali al-Naimi talks to journalists as he arrives at his hotel ahead of an OPEC meeting in Vienna, Austria, June 1, 2015. Naimi said he expects oil demand to pick up in the second half of 2015 while supply decreases, in a sign that the Saudi strategy of defending market share through lower oil prices was working.

Optimistic comments from a Saudi official lifted crude oil prices Tuesday, in anticipation of a key Organization of Petroleum Exporting Countries meeting Friday.

Arriving in Vienna, Saudi Arabia’s oil minister Ali al-Naimi told reporters Monday that OPEC’s strategy of maintaining production is paying off: Demand for oil is increasing while supply slows, Mr. al-Naimi said. Those upbeat comments may confirm that Saudi Arabia, OPEC’s leading producer, plans to keep oil output steady at the semi-annual meeting later this week.

“The more al-Naimi talks before the meeting, the less likely there are unexpected changes at the meeting,” says David Livingston, an associate in the energy and climate program at the Carnegie Endowment for International Peace, a Washington-based think tank. “The Saudis are committed to policy continuity right now.”

US crude prices rose to $61 a barrel after al-Naimi’s comments, and Brent, the international benchmark price, rose slightly as well. The uptick is a small but welcome one for an industry left reeling by low prices – the result of too much oil supply and weak demand. Between June and December 2014, the glut of oil led prices to collapse more than 50 percent, tumbling from over $100 a barrel to lower than $50.

Low prices have forced drillers in US shale – where the cost of extraction is higher – to stack rigs and lay off workers. But over the last several months prices have stopped falling, and Tuesday’s price was the highest since December 2014. A weakened dollar and increased refinery demand also contributed to Tuesday’s price climb.

OPEC last decided to maintain production at its November 2014 meeting, which sent oil prices plunging. Maintaining output at the current rate at the June meeting would mean OPEC’s production ceiling would stay at 30 million barrels a day, as part of Saudi Arabia’s gambit to keep market share from being gobbled up by US shale producers, Russia, Mexico, and others. And al-Naimi’s satisfaction with that policy suggests the status quo is the most likely outcome of the meeting Friday, analysts say.

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"Demand is picking up. Good! Supply is slowing, right? That is a fact," al-Naimi told reporters. "You can see that I'm not stressed, I'm happy."

If Saudi Arabia were to slash OPEC’s output, on the other hand, it would be an effort to prop up the price of oil. Venezuela and Nigeria – OPEC producers that rely on high oil prices – have been struggling in the low-price environment, and favor slashing production to push up oil prices.

But al-Naimi’s comments not only signal that production cuts are unlikely – they also encouraged some to say OPEC could raise production targets, since its actual production is surpassing official targets anyway.

“Since OPEC is already producing more than 31 million barrels a day, it might be conceivable that they not only fail to cut production, but they raise the quota, which would be a move toward establishing greater credibility,” Mr. Livingston said in a telephone interview Tuesday.

And assuming Saudi Arabia holds steady, that puts the ball in the court of US shale oil producers who’ve struggled to turn a profit amid low prices.

“Now it is the shale drillers who must decide whether to respond to the recent price rebound by re-activating rigs and completing more wells, at the risk of sending the price tumbling again,” Reuters market analyst John Kemp wrote Monday.

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