Saudis seen letting oil market play out

Back from Saudi Arabia, Robert McNally is more convinced than ever of two things: The kingdom is determined to stick to its plans to produce oil at a high rate despite the plunge in oil prices over the last 10 months, and OPEC as a whole is unlikely to respond to the slump any time soon.

"It's more of an emphasis or determination. It's more of a volume or decibel level," McNally, who was an energy adviser to President George W. Bush and now runs an energy consultancy in Washington, said of recent remarks by Saudi Oil Minister Ali al-Naimi and OPEC officials.

McNally was in Riyadh when Naimi said Saudi Arabia, the largest oil exporter in the world, was producing about 10 million barrels a day, the most since oil prices began to plummet in July.

His visit came just before Saudi Arabia took military action in Yemen in an effort to reverse an insurgency by Iran-backed Shiite rebels, a reminder that the world oil market remains at risk from upheavals in the Mideast. It also preceded last week's announcement by diplomats from Iran, the U.S. and other world powers of a framework nuclear deal that could eventually enable Tehran to pour more oil into that market.

But for now, Saudi Arabia is holding firm on its refusal to act alone to bolster oil prices.

"You're starting to see Naimi saying publicly with a little more insistence and the OPEC guys saying privately that the era of OPEC managing the market is over, and we have to adjust our thinking accordingly," McNally told me following his return from the Saudi capital.

While other oil-producing nations without Saudi Arabia's wealth, such as Nigeria and Venezuela, look to the kingdom to cut production and try to buck up prices, as it did during a similar price collapse in the 1980s, there are no signs now that Riyadh will reverse its stand any time soon.

"I think there have to be two conditions met for the Saudis to consider altering their policy," McNally said. "One, they have to believe there's been a sufficient curtailment in (U.S.) shale oil investment so that shale oil supply will decline. … And so far, there's no hard indication of that."

The second condition for a Saudi change of heart, he said, is "some indication" from Moscow, Baghdad and Tehran that "they're willing to cooperate in adjusting their supply in the interest of market stability. And on that, there's been no indication."

Short of seeing those developments, Saudi leaders will maintain what McNally describes as "a steely resolve to let this play out further, and let the price fall, and generate more pain until their goals are reached. … I think they're determined to see this through."

The "pain," at least from an oil producer's standpoint, may continue for some time, especially among companies operating relatively high-cost shale wells in the U.S.

Various forecasts see per-barrel oil prices hovering in the $50-$60 range for the next year or so. Among them, the U.S. Energy Information Administration, which predicts West Texas Intermediate oil prices will average $52 a barrel in 2015 and Brent prices will average $59. Brent is the benchmark for international oil prices and WTI is the U.S. counterpart.

And even if Saudi Arabia and its OPEC partners manage to agree on steps to cut oil supplies and raise prices, there are increasing signs that the cartel may not wield that much clout any more, especially in light of competition from shale oil production in the U.S., a nation on the verge of overtaking Saudi Arabia and Russia as the world's leading crude oil producer.

"If Saudi Arabia is not going to manage the market, price gyrations and boom-and-bust cycles may have to return," McNally said. "And people are starting to think through what that means, and if it's a good thing."

Like it or not, OPEC has lent some level of predictability to oil prices, he added, offering an observation that he acknowledged "gets me in trouble" in some circles.

"From a price-stability standpoint, the only thing worse than OPEC managing the market is OPEC not managing the market. That's what's coming next."

Bill Loveless – @bill_loveless on Twitter – is a veteran energy journalist and television commentator in Washington. He is a former host of the TV program Platts Energy Week.