Saudi Arabia is showing no sign of changing its policy of high oil output to support global economic growth, despite a fall in crude prices below $90 a barrel for the first time in 18 months.
Gulf and Western government sources in contact with Saudi officials said the Opec power can tolerate oil at $90 or below for months, price levels that hurt Iran and Russia as they face off against Riyadh over the conflict in Syria.
Saudi Arabia has built up a revenue surplus in the first half of the year and requires a much lower oil price to balance its budget than most of its fellow Opec members and leading non-Opec producer Russia.
“If we keep producing at roughly the same rate, we’re not flooding the market,” said a senior oil official from a Gulf producer. “And we want to act responsibly for the sake of the world economy.”
Strong supporters of Syrian rebels seeking to oust Syrian President Bashar al-Assad, Saudi leaders have criticised Russia for defending him.
With Iran, Russia is Syria’s main ally, providing most of its arms. Both Moscow and Tehran need crude at $115 a barrel to meet budget requirements.
“Russia’s economy is vulnerable to a sharp drop in oil prices,” said US oil analyst Phil Verleger. “The Saudis may be able to exploit that vulnerability by keeping production at 10mn bpd.”
Industry sources say Saudi Arabia, the only oil producer with significant spare capacity, looks set to trim output over the next two months, but only because demand from refineries in China and the US will dip.
“We’re told the Saudis are OK with lower prices, $90 or below, for a few months,” said a Western diplomat. “Even if they have to trim back because of lower demand they don’t give us the impression they’ll be bailing out Opec on price any time soon,” he said.
Crude is down from a March peak of $128 partly because the economic outlook has darkened but also because Saudi Arabia, pressed by major consumer countries, opened the taps in March to a 30-year high of 10mn bpd.
That has made up for a slump in output from Iran because of sanctions, not only drawing criticism from Tehran but others in the Organisation of the Petroleum Exporting Countries who prefer higher prices including Algeria, Iraq and Venezuela.
As the group’s main swing producer, Riyadh is largely responsible for the extra volumes that have taken Opec in excess of its official 30mn bpd output ceiling.
Opec ministers at a meeting in mid-June said they would adhere to the collective limit, implying a 1.6mn bpd cut from actual supply for 12 members of 31.5mn.
For that to happen Saudi Arabia would need to cut back sharply. The prospects of that look slim.
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