Need for Higher Prices Putting Pressure on Saudi, OPEC, and US Shale

Rumours suggest the Saudis could split from the cartel over its Aramco IPO. File Image / Pixabay

Despite spectacular price gains for crude on Friday, the call for consistently higher prices is louder than ever and coming from two fronts: Saudi Arabia, which needs oil to be at least in the $60s in order to make feasible its long-planned IPO of Saudi Aramco; and U.S. shale producers, who despite posting healthy profits in 2017 need better prices for their investments to pay off in the long term.

In fact, the Saudis' need for higher prices is so intense there is renewed talk that the kingdom might quit the Organization of the Petroleum Exporting Countries (OPEC) according to Reuters, which stated, "The IPO....raises questions over Saudi Arabia's future role in OPEC, as the kingdom would become the only member with a national oil firm listed abroad; t hat in turn raises questions over the future of OPEC itself given the kingdom has been the group's driving force since its inception almost 60 years ago."

Saudi officials have met officials from Norway and Statoil to discuss how best to restructure Aramco's business operations ahead of the IPO, according to industry sources; additionally, some Aramco executives supposedly do not believe that Saudi Arabia's OPEC policies in preparation for the IPO will benefit the company - because the cartel's cutbacks have eaten away Aramco's market share in Asia.

Meanwhile in the U.S., a Moody's Investors Service study of 37 North American exploration and production companies shows that while the companies have achieved dramatic cost cuts, any improvement in their ability to sustain healthy returns will have to come from commodity prices.

The study's authors wrote, "Companies will be able to demonstrate meaningful capital efficiency, measured by the leveraged full cycle ratio, only if the West Texas Intermediate oil price is above $50 per barrel and the Henry Hub natural gas price is at least $3.00 per million British thermal units."

However, that's not to say the Americans are discouraged by the current state of affairs; far from it: in reaction to Exxon Mobil Corp taking eight blocks of Brazil's offshore Campos basin earlier this week at a record bid auction, Brian Youngberg, an analyst at Edward Jones, remarked, "If anyone can bring a low-cost approach to doing something as big and complex as that, it is probably Exxon Mobil."

In fact, the can-do spirit of shale producers has become so intense that the latest Reuters poll shows that the 36 analysts and economists surveyed believe the American output will hamper the rebalancing between global crude supply and demand.

Rahul Prithiani, director at CRISIL Research, stated, ""With high adherence by OPEC members to the output cut decision in recent months, the market is seen tightening ... With the rise in prices, we expect the U.S. to continue pumping higher output, thus impacting market rebalancing."

While the prospect of Saudi Arabia leaving OPEC may seem remote, there have been reports of discord between the cartel and non-members, case in point: Russia, whose compliance under OPEC's cutback deal has been well short of what was promised, and the former Soviet Union's determination to pump all-out in the near future regarded as a sign that a split in relations could occur.