Energy Prospectus

Oil prices rebounded from earlier losses to spike higher on Monday, after Saudi Arabia said it is prepared to use all measures necessary to ensure a stable oil market.

The world's biggest producer said it is ready to cooperate with OPEC and non-OPEC producers in order to stabilize prices.

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OPEC will meet on December 4 to review their output strategy. Saudi Arabia and other Gulf OPEC members have recently indicated they will continue to stick to their policy of defending market share by keeping production high.

The possibility of higher interest rates in the U.S., a broadly stronger U.S. dollar and slower global economic growth, especially in China, further weighed.

Ali bin Ibrahim Al-Naimi, the Saudi minister for petroleum and mineral resources, spoke at the Seminar on Future of Energy in the Middle East and North Africa in Bahrain, according to a statement from the Saudi press agency.

"Perhaps it would be fitting here to mention the role of the Kingdom of Saudi Arabia in the stability of the oil market, and its continued willingness and prompt, assiduous efforts to cooperate with all oil producing and exporting countries, both from within and outside OPEC, in order to maintain market and price stability," Al-Naimi said.

At a Saudi cabinet briefing on Monday, stability in the oil market was also mentioned.

"The Cabinet stressed the Kingdom's role in the stability of the oil market, its constant readiness and continuing pursuit to cooperate with all oil producing and exporting countries," according to another statement from the Saudi press agency based on the meeting.


The two statements were viewed by the market as a sign that Organization of Petroleum Exporting Countries (OPEC) — which is dominated by Saudi Arabia — might alter its policy of holding oil output in the face of slumping demand.

The comments from the Saudi’s followed comments from Venezuelan Oil Minister:

Oil prices could plunge to the lows of mid-$20s a barrel next year if OPEC doesn’t change its policy to stabilize the market, said Venezuelan Oil Minister Eulogio Del Pino.

"OPEC has to do something very soon ... We don't agree with the position that says the market, some way, is going to dictate the price of crude oil. We don't agree with that position of Saudi Arabia," the minister said on the sidelines of the Gas Exporting Countries Forum (GECF) summit in Tehran.

He also told reporters that Venezuela is urging the cartel to adopt an ‘equilibrium price’ which covers the cost of new investment in production capacity. The country sees the `equilibrium price' at $88 a barrel, according to Del Pino, who added that Saudi Arabia and Qatar are to consider the proposal.

Saudi Arabia is pumping record amounts of oil this year, leading OPEC’s effort to defend market share even as Brent crude trades near the lowest level in six years. The slide in oil revenue has forced the kingdom to tap savings and sell debt to preserve the riyal’s peg to the dollar that has been in place since 1986. For Bank of America Corp., that may mean the country faces a “critical” choice next year: either cut production to help boost prices or adjust the riyal’s rate to stem the decline in foreign reserves.

“A depeg of the Saudi riyal is our number one black-swan event for the global oil market in 2016, a highly unlikely but highly impactful risk," Bank of America strategists led by Francisco Blanch in New York wrote in a Nov. 19 report. “It is a lot easier politically to implement a modest supply cut at first than allow for a full-blown currency devaluation."

One-year forward points for the riyal climbed 120 points to 575 as of 3:53 p.m. in Riyadh, the highest level since December 2002. That reflects expectations for the currency to weaken about 1.5 percent to 3.8088 per dollar over the life of the contracts.

Weaker global growth and inflation as well as the strength of the dollar will remain “huge" headwinds for dollar-based commodity prices, Bank of America said. Brent crude, the benchmark for more than half the world’s oil, advanced 1 percent to $45.09 per barrel, trimming losses over the past 12 months to 43 percent.

Robust Reserves

Still, Saudi Arabia’s reserves are hardly depleted. Though net foreign assets fell to a near three-year low in September as the government drew down financial reserves accumulated over the past decade, they’re among the highest in the region at $646.9 billion.

Central Bank Governor Fahad Al-Mubarak said in September the nation will maintain the currency’s peg to the dollar as long as the economy is dependent on oil. That attachment has survived lower oil prices in the 1990s and revaluation pressure resulting from surging prices in the late 2000s, Shaun Osborne, the Toronto-based chief foreign-exchange strategist for Scotiabank, wrote last week.

The government has "plenty" of options to avoid a currency devaluation that could accelerate inflation and impact political stability, Jason Tuvey, London-based Middle East economist at the research house Capital Economics, said in an e-mailed report Monday. If authorities don’t cut oil output, they are more likely to cope with low prices by cutting capital spending, already underway, or energy subsidies before weakening the riyal as "a very last resort," he said.

Pressure may also build on the Chinese yuan as reserves at central banks across the world decline against a backdrop of looming U.S. interest-rate increases, Bank of America said. A slump in the yuan may ultimately force Saudi Arabia’s hand because of the “very high sensitivity" of commodities to the currency, the bank said.

Saudi Arabia, the biggest member of the Organization of the Petroleum Exporting Countries, produced more than 10 million barrels of oil a day in each of the past eight months and pumped a record 10.57 million barrels a day in July, according to data compiled by Bloomberg.