By continuing to use this site, you agree to our use of cookies.


In Japan? You can go to Argus Japan


Output deal hinges on inventories: al-Falih

7 Mar 2017, 6.16 pm GMT

Output deal hinges on inventories: al-Falih

Adds more details from discussion.

Houston, 7 March (Argus) — Saudi Arabia will use global inventory levels as a metric in assessing the success of the production cut agreement between Opec and major non-Opec producers, in addition to monitoring countries' compliance, Saudi oil minister Khalid al-Falih said.

The level of inventories also is the first factor Saudi Arabia will consider in deciding whether to extend the agreement that expires in June, al-Falih said at the CeraWeek conference in Houston today.

"We need to bring the inventory level into a five-year band," he said. The cuts implemented under the December agreement have resulted in some drawdowns. This is leading to a flip in the market, "with east-west arbitrage emerging that is indicative that the cuts are biting in some regions."

Al-Falih said he was encouraged by the initial collaboration among parties to the agreement, adding that his message both publicly and privately remains that Saudi Arabia would not "carry the burden of free riders." Both Opec and non-Opec producers are heeding the message and "are reinforcing voluntary management of production," he said. "Both realize that such an extended network of producers is the only way to achieve a stable market for all."

Saudi Arabia led the way with compliance by allowing its output to drop below the psychologically important 10mn b/d, well below its production capacity of 12.5mn b/d, al-Falih said.

Opec production cuts exceeded the agreed 1.2mn b/d target for a second month in February, putting compliance for the producers' group at above 100pc. Saudi output was 740,000 b/d below the October baseline in February — well in excess of the 490,000 b/d reduction it pledged.

By contrast, compliance among non-Opec parties to the agreement was 51pc as of February, meaning a reduction of 282,000 b/d was implemented out of the pledged 559,000 b/d. Russia so far has implemented 40pc of its pledged 300,000 b/d cut for the January-June period — a level that Russian energy minister Alexander Novak said would be reached in April only.

Despite cooperation with other major producers, "Opec remains the only catalyst for the stability of the market," al-Falih said. The current intervention reflects what he described as a temporary inventory glut, and he said it was in line with "the Saudi framework of production management for a limited amount of time and then allowing the free market to do its work."

Al-Falih warned against complacency among investors and producers in relying on the agreement to help address structural changes in the market. "History has also demonstrated that intervention in response to structural shifts is ineffective." The output cut agreement merely helped augment the ongoing change in market fundamentals, he insisted. But "uncertainty will continue until the trend for inventory drawdowns will reassert itself and the market will become more comfortable with its capacity to absorb additional marginal supply," especially from the US shale producers.

Overall, "there is cause for optimism as we see the green shoots of the recovery," he said, quipping that "the green shoots are definitely here in the US, and maybe growing too fast."

But the rebound in US production is not worrying Saudi Arabia, "despite what you hear," al-Falih said. In fact, he said he is more worried about worldwide investment falling behind future demand, which would set the stage for a supply crunch.

Global oil demand will continue to rise in the long run, led by demand in India, China and other emerging markets, he said. Investment into long-cycle projects has declined even though Saudi Arabia is bucking that trend.

"I am concerned that misguided projections of peak demand and stranded petroleum resources may discourage the trillions of dollars of investment" required to meet the growing demand for oil despite the ongoing transformation of the global energy industry in response to climate change policies and development of renewable energy sources, al-Falih said. "The underinvestment will be compromising the energy security by squandering our natural endowment, which will lead to market volatility, price spikes and more acute energy poverty."


View more news articles

Share this page

Contact Us

Request a callback

I agree to the Argus privacy policy