Saudi Arabia is talking the oil market up lately. That’s a big change from a few months when it was talking the market down.
In fact, Saudi Arabia has been doing much more than talking the oil market up – it has been hiking oil prices.
It was back in February when Ali al-Naimi, Saudi Arabia’s petroleum minister at the time, told American frackers publicly that they would be crushed by the market. By an oil oversupply, that is, due to the fact that they didn’t have the cost structure to survive an on-going price war that threatened to take oil close to $20.
Last week, Saudi Arabia’s new petroleum minister Khalid Al-Falih had had a different message to American frackers. “We are out of it,” he said in an interview with Houston Chronicle. “The oversupply has disappeared. We just have to carry the overhang of inventory for a while until the system works it out.”
Read more: The Huge Political Risk of Saudi Arabia’s Oil Reform
What happened?
Several things. First, American frackers have indeed been crushed, slowing down the flow of new oil to the market–US oil rig counts are about one-fourth of what they were at the peak, two years ago. Second, Saudi Arabia has been paving the way for Aramco’s IPO, to raise very much needed cash to close the fiscal and social gaps opened by the two-year price war, which took the oil price down from $107 to $26 (the higher the oil price, the sooner the gap will be closed).
Third, Saudi Arabia has a new oil minister to make sure that it will happen.
Will the Kingdom succeed in keeping oil price higher ahead of the Aramco IPO? It all depends on these three factors.
First, the state of the global economy, which sets the pace for the demand for crude oil. Second, whether Iran will continue to pump out oil to increase market share, while undercutting Saudi Arabia’s Aramco IPO plans in the process. And third, how quickly American frackers will re-open rigs—US rig count has been turning north again in recent weeks.
In the meantime, oil markets should brace for another rough ride that might take crude oil to $40 or even $30 before it takes it to $60.
