Oil-price volatility has remained high over the past week. The daily trading range for front-month Brent exceeded USD 3/barrel (bbl) on four days, and USD 4/bbl on two days, during a series of violent price swings to either side of USD 60/bbl. According to Standard Chartered comments on Saudi policy:
- Saudi Arabian Minister of Petroleum and Mines, Ali Naimi’s statements appeared designed to ensure that oil prices do not find an early base. We believe that the Saudi strategy is to cause lasting damage to the capability of non-OPEC producers to expand in the long run. As noted in the focus article in this report, we do not think that US tight oil will take a large share of that long-run output adjustment. Instead it is conventional non-OPEC output that appears the most vulnerable, particularly in areas where over a number of years there has been a proven failure to cut costs. In 1985-86 Zaki Yamani, the Saudi Petroleum minister then, ran a policy aimed at weakening the North Sea. As part of the current policy, it appears to us that Ali Naimi appears intent on finishing that job.
- Our base case still assumes that Saudi Arabia is aiming for a short sharp shock to other producers rather a long slow war of attrition. However, the process is likely to be highly data-driven, and we expect the future evolution of policy to be conditional on both demand and non-OPEC supply data. Thus far, the indications are still that the oil market will more than balance in H1. However, should demand sag or nonOPEC supply show any resilience at current prices, we would expect Saudi Arabia to roll its low-price policy into H2.
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