How Saudi Arabia views the oil market

An adviser to Saudi Arabia’s oil minister presents reasons for swinging prices and clarifies the assumptions that Opec producers are sabotaging the commodity.

Vehicles form a line behind a motorist re-fueling at a gas station. Julio Cortez / AP Photo

Ibrahim Al Muhanna, an adviser to the Saudi Arabian oil minister Ali Al Naimi, gave a speech in Doha on Sunday. Below is a partial transcript:

A few weeks ago, in Riyadh, I was at a small, private function along with the British central bank governor, Mark Carney. Mr Carney asked me two questions. First, why did the oil price drop? And the second, where is the price heading? I will tell you today what I said to him then.

I do not believe the fundamentals of supply and demand justified the sudden and rapid price fall during the second half of last year. The market was balanced, and commercial stocks were within their normal range. Yes, supply was starting to increase, but demand remained strong and there was not a very sudden rise in commercial stocks.

I believe the price fall can be put down to expectation and speculation. It was not about fundamentals. It reminded us of 2008, when all the speculation was that we were running out of oil resources and had limited production capacity. The recent price fall was largely due to expectation and perception about future supply and demand. Also similar is the wrong assumption of changing Saudi oil policy, and the ever-present – and incorrect – belief in conspiracy theories.

So let me set out some of the events that had an impact. By late June last year, some forecasts talked of oversupply by the end of the year, and into this year. The price started to fall slowly to US$100, and then to $90 during the following month. In October last year, a senior Opec official was asked, at a private dinner in New York, if he thought prices would drop to $80. He said anything is possible but, if it happened, many oil- producing countries could handle it. During the same week, in London, another official was asked the same question and he gave a similar answer. Then rumours began to circulate that Saudi Arabia, and perhaps some Opec producers, wanted lower prices. People started to speculate as to why this may be. And wrong assumptions started to go around. Many analysts started to focus on political reasons instead of economic ones, such as planning to harm other nations for political goals.

In the same month, there was another incorrect assumption. Saudi Aramco changed its price formula for Asia. A leading US newspaper report specifically used the phrase “price war”, saying Gulf producers were at war over prices. These Aramco prices, by the way, rise and fall, month by month, and are driven purely by business imperatives. Saudi Aramco has never been in a price war with anyone.

As often happens, many commentators confuse cause and effect. Are lower prices bad news for Russia? Yes. Is it bad for Saudi Arabia? Yes. Is it bad for the industry? Yes. Does Saudi Arabia set the oil price? No. Did it cause the lower price for political or economic goals? No. Claims to the contrary are untrue, full stop. Yet rumours and conspiracy theories grew bigger and bigger, and the oil price was going down. We tried to stress the facts on the grounds, but it wasn’t easy to convince people. A herd mentality took over.

In early November, minister Naimi visited Venezuela, and also met with their foreign minister, Mr [Rafael] Ramirez. He was keen for concerted action in terms of production and was soon on a globetrotting mission to attempt to convince other Opec and non-Opec producers that this was the way forward. He had our support.

On November 25 last year, one day ahead of the Opec meeting in Vienna, Saudi Arabia, Venezuela, Mexico and Russia had a private meeting to discuss possible joint production cuts. Neither non-Opec producer was prepared to cut. They have their own reasons. So Opec took a bold decision. In the current circumstances, it could not act alone. It agreed to keep the same production level and to let the market balance itself.

Soon after the Opec meeting, various theories were put forward about Opec’s and Saudi Arabia’s intentions. The conspiracy theory shifted completely. From being against Russia and/or Iran, to being all about hurting US shale oil production. And others said Opec was dead. It was like staring into a mirage. It was all nonsense, but it does have an impact on the direction of the oil price, at least for a couple of weeks.

Ladies and gentlemen, I will now talk about the second question put to me by governor Mark Carney: where’s the oil price heading?

Once the conspiracy theories lost their allure, serious commentators got back to the fundamentals, and the price started to stabilise around $60 during the past few weeks. I’m confident that demand is, and will be, stronger. I’m also confident that supplies will be just sufficient to meet demand and that prices will firm up.

Why am I confident in both the short and long term? First, I believe the global economy will continue to grow, especially in emerging and developing countries. Second, the global population will continue to increase and third, day after day thousands of people enter the middle classes and this will further increase demand for energy. Europe may be the exception, but overall the global picture remains positive.

The problem, as I stated at the outset, is wild price swings, up or down. These are no good for producers, consumers or investors. Oil is a long-term business, requiring long-term plans and long-term investor confidence.