There’s a big shift taking place in the oil industry. The world’s biggest oil producer, Saudi Aramco, is cutting its ties with the country’s Oil Ministry. In other words, Aramco can start acting more like a business — motivated by profit margins — and less like a political party. If it does, prices may rise as Saudi Aramco regains its competitiveness by cutting its oil output.
The price of Brent Crude oil, which has been steadily rising since March, is trading at US$65 a barrel. Yet that’s still well below the US$100 price point in mid-2014. But the world is still awash in oil, as oil exports from Saudi Arabia have remained high. That’s why prices are still $40 below what they were in August of last year. That’s where an independent Saudi Aramco could change the landscape for all producers. In order to understand why, you need to know Aramco’s history.
Saudi Aramco has been tied at the hip to the government’s Oil Ministry. As the largest oil producer, Aramco’s decision making is influenced by the Oil Ministry. If the Saudi government has political aims it could rely on Aramco to exert pressure on other nations. It can do this by influencing the amount of oil on global markets, exerting upward or downward pressure on prices.
It’s not an exaggeration to say Saudi Aramco has the capacity to do this. Aramco has long been accused of manipulating oil supplies — and prices. As the largest oil producer in the world, it has the power to do that. It’s the biggest exporter in the largest oil producing nation on earth.
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Saudi Arabia sits on almost 16% of all proven oil reserves. That gives it Aramco clout in international markets. And it gives Saudi Arabia greater political influence. Why? Because no country wants to jeopardise its oil imports. The Saudi government uses this influence as leverage over other nations.
In fact, Saudi Arabia is believed to be behind the steep drop in global oil prices since August 2014. The Saudi’s not only flooded the market with cheap oil, but they maintained high outputs in a depressed market. Usually, when prices go down, exporters cut back on production. Not Saudi Aramco.
If that strikes you as commercially irresponsible, that’s because it is. But the Saudi’s weren’t concerned about that. They wanted to put pressure on US shale oil producers. The shale oil industry hasn’t recovered since, because it can’t compete with such low prices of crude.
That’s what makes this a potential sea change for oil prices in the future. Removed from its political arm, the company can regain its commercial competitiveness. And it could do this by lowering oil production to nudge prices back to mid-2014 levels. That would improve profit margins at Saudi Aramco. But if their renewed competitiveness leads to lower global oil supplies, it would also spell good news for competitors.
What this move could mean for Australian oil producer Woodside Petroleum?
Developments at Saudi Aramco won’t escape the attention of Woodside Petroleum [ASX:WPL]. If Aramco controls its export levels to send prices in an upward direction — that would ease pressure on Woodside’s profit margins.
Woodside stocks have fallen by AU$10 since August 2014 to AU$34.61 on the back of plummeting oil prices. In order to combat this Woodside have embarked on a cost cutting program. Woodside recently told investors the measures will save the company up to $800 million by the end of 2016.
Woodside also plan to step up expansion efforts in the future. Over the next two years, it expects to start engineering work on its Browse LNG project in Broome. And production from the Wheatstone LNG project will begin in late 2016.
With the cost cutting measures, and the potential resurgence of oil prices, Woodside could be entering a period of renewed growth. There is potential that Woodside’s share price recovers back up to mid-2014 levels to $44 per share.
But this will depend on Saudi Aramco’s strategy going forward. If it starts thinking about its own profit margins, then prices could rise as a result of falling global oil supplies.
Contributor, Markets and Money
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