135th Meeting Of The Organisation Of Petroleum Countries (OPEC) Conference

Saudi Arabia’s oil minister Ali al-Naimi has not spoken publically since September 11, but when he broke his silence today, the market was left with little evidence regarding Saudi oil policy going forward. Al-Naimi did take the opportunity to shoot down speculation that Opec members were in the midst of a price war.

The price war story broke a few weeks ago when Saudi Aramco cut the official selling price for oil delivered to Asian customers. However, as Breaking Energy reported, it appears the Saudi national oil company was simply following broader market signals, as Asian spot prices had declined. They subsequently increased official selling prices to Asia, further dampening the prospect of a price war.

The more interesting story perhaps was here in the US where the Saudis were slow to cut OSPs as the price of WTI and other US grades declined. Aramco dropped its prices last week. Another popular assertion among market watchers was that the Saudis were trying to force some smaller US operators out of business by forcing oil prices down. Shale drilling is capital intensive and well production rates quickly decline which often necessitates reinvestment into drilling new wells. When oil prices fall – and the cost of wells does not – this strategy faces headwinds.

“Talk of a price war is a sign of misunderstanding — deliberate or otherwise — and has no basis in reality,” al-Naimi said at a natural gas forum. “Saudi Aramco prices oil according to sound marketing procedures — no more, no less.” – As reported by Bloomberg

It appears the Saudis are taking a longer-term wait-and-see approach to the current oil bear market, but their actions at the upcoming Opec meeting will provide more visibility into their strategy.

“But none of that implies the Saudis are intent on an all-out price war or even a plan to run smaller capitalized U.S. shale exploration and production companies out of business. It is, rather, a likely strategy by the Saudis to let this bear market shake out the weaker participants over time, without using their “swing barrel” production to try to force markets back into equilibrium,” The Street’s Daniel Dicker wrote in a recent post.

US shale drillers likely have a bit more oil price room to run, but some are getting spooked by current market conditions. An employee at one of the larger US independents with several Wolfcamp rigs running recently told me he needs $68/bbl oil prices for those wells to remain profitable. Now that is just a small part of one company’s development portfolio, but is another piece of the US unconventional “how much is enough” puzzle.