Saudi Arabia has, for the past few years, been in the opinion that the oversupply in the oil market will suppress any rises in the oil price and cause smaller competitors to die out. This has proven to be correct, as the oil price had dropped to the 20s before beginning its recovery, and many oil companies have declared bankruptcy or halted production. However, very recently the Saudi Arabian government has changed their stance to indicate they believe the oil price will continue to increase.
Saudi Arabia did successfully eliminate many of its smaller competitors when OPEC allowed the production of oil to surpass demand. It now appears that the Saudi government believes it has done sufficient damage to the industry to start looking towards a recovery.
Khalid Al-Falihhad, who became the new Saudi Arabian Prime Minister in May of this year, stated in an interview with the Houston Chronicle that “The oversupply has disappeared. We just have to carry the overhang of inventory for a while until the system works it out.”
The Saudi government has a vested interest to make sure that the oil price rises. The government is initiating the IPO, or initial public offering, of its national oil company, Saudi Aramco. In doing so, they will, ideally, raise the necessary cash to recover some of the budget funds that were cut or lost due to the price war.
Oil production has dropped rapidly in the past months since the oil oversupply that started towards the end of 2014. This is due to an inability of global oil companies, many of which were in the U.S., to profitably extract and produce oil when the price drops below a certain threshold. Hundreds of rigs within the United States were shut down or idled until a time when profitability can once again be achieved. The rise in the price of oil should be accompanied by a return to idled rigs and increased production.
Article written by HEI contributor Timothy McNally.