OPEC Seen Backing Saudi Arabia’s Plan to Keep Supplies Elevated

(Bloomberg) -- When Saudi Arabia argues next week that OPEC should keep up production to fight the rise in U.S. shale oil levels, prices will be on its side.

Crude plunged for eight of nine weeks prior to group’s November gathering, when the kingdom faced down opposition from the majority of fellow members, who advocated output reductions to tackle a global glut. With oil companies around the world cutting investment, U.S. output peaking and prices up, Saudi Arabia’s strategy will be extended at OPEC’s semiannual meeting on June 5, say Societe Generale SA and Bank of America Corp.

Oil prices have recovered more than 40 percent from a six-year low in January as U.S. production eases from the highest in more than four decades. The rebound will help vindicate the approach taken by Saudi Arabia as it steers the Organization of Petroleum Exporting Countries to favor market share over prices in a bid to drive out high-cost producers.

“The Saudis probably feel their strategy is working and rightly so,” Francisco Blanch, Bank of America’s head of commodities research, said by phone from New York. “There’s a major decline in the U.S. rig count, and a huge reduction in capex spending. That’s a sign the strategy is working.”

Lingering Resistance

At OPEC’s Nov. 27 meeting, Saudi Arabia, the United Arab Emirates, Kuwait and Qatar rebuffed objections from the other eight members -- in particular Iran, Venezuela and Algeria -- to their plan. While there may be resistance at the June 5 conference, all but one of the 34 analysts and traders surveyed by Bloomberg said OPEC will maintain its daily production target of 30 million barrels, ratifying the Saudi strategy.

“The fact that prices have recovered somewhat, and we appear to be past the bottom, that’s something the Saudis will be able to point to in their discussions,” Mike Wittner, head of oil market research at Societe Generale, said by phone from New York on May 19. “And the other thing they’ll be able to point to is that U.S. production has topped out.”

Brent futures tumbled 33 percent from last summer’s peak of $115.71 a barrel by the start of OPEC’s November meeting and extended the loss to $45.19 on Jan. 13. It settled at $63.72 on May 26. Bank of America forecasts the grade averaging $62 a barrel this year, while Goldman Sachs Group Inc. sees it slipping to $51 in six months.


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