Al-Sabban: Saudi-Russian cooperation is key to rebalancing oil market

Argaam talks to Mohammad Al-Sabban, Saudi economist and former senior adviser to the kingdom’s oil ministry, just ahead of the upcoming OPEC meeting. Al-Sabban, who is also a member of the Supreme Economic Council, believes Saudi-Russian collaboration is key to rebalancing the global oil market. He also expects prices to hover around $45-55 a barrel until at least 2017.

Q: Do you think the Saudi-Russian cooperation committee can contribute in stabilizing the oil market?

A: The committee was established in a good timing.

OPEC’s role in stabilizing the oil market has weakened because of the deterioration of relations among some of its own members and its dwindling market share of the global oil market. That made it impossible to have a unanimous decision without the input of Russia, a non-OPEC major producer.

A country like Russia can play an important role in pressuring some oil producing countries they enjoy good relations with, such as Iran.

Q: What’s the impact of such cooperation on the outcome of the OPEC meeting in Algiers and oil prices?

A: The Saudi-Russian cooperation has helped stir the stagnant oil market situation. It has given hope that stabilizing the market would be possible and it has helped supporting oil prices, though it was temporary.

Q: Some are questioning the motives of Russia. They say Russia wants to know what’s going on inside OPEC meetings, but has no intention to cooperate with them. What do you think?

A: I don’t think so. Russia is very serious about its cooperation with other oil producers to stop the oil price deterioration because OPEC alone can’t do that. But, its influence could be limited due to the fact that the government does not have total control on decision of private companies working in the oil sector.

Q: Do you think the Russian decision has anything to do with its need to increase its oil revenues amid a dwindling foreign currency buffer?

A: Russia, like the rest of oil prodders, is facing an economic problem because of low oil prices, which was aggravated by Western sanctions. Its reserves have dropped to $15 billion this year, compared with $32.2 billion in the same month last year. If oil prices remain around $40-50 a barrel, the reserves will deteriorate further, and that is why they are more responsive in cooperating with other states.

Q: Several countries seem to have changed their position since the Doha meeting in April. Do you think they can make an impact on the oil market, or will supply and demand remain the major factor to affect oil prices?

A: Back then, many countries were under the impression that the market has balanced out and prices will continue to increase, based on some market analysis and research by funds and banks investing in the futures market. But now such countries understand that the situation is the same, that the market is oversupplied and there is no way to support prices as long as global productions remain at such levels.

Q: Iran has showed some flexibility. How would that impact oil prices or reaching a decision in Algiers?

A: Doha April meeting failed because of Iran as it refused to attend or to cut production. It said it has not reached pre-sanctions production levels of 4 million barrels a day. But its exports reached 2 million barrels a day, which is similar to its pre-sanctions levels.

There is a concern that the Iranian attitude will remain unchanged, which will have a negative impact on any agreement and its effectiveness in the market.

Q: What do you think of OPEC’s new secretary general?

A: He is the right man in the right place.

Q: Do you think the deteriorating economic situation in the oil producing nations could pressure OPEC to cut production instead of freezing it?

A: Cutting production is not on the agenda of the producers for now. I don’t think it’s completely ruled out, but it won’t be discussed until countries agree and commit to production freeze. I don’t thick the current market needs immediate production cuts because of the existence of the preferred shale oil output. Shale producers will increase their production, if oil pries are at or higher than $50/barrel levels.

Q: What’s the importance of having producers like Indonesia and Gabon rejoin OPEC?

A: Support from such nations is very important.

Q: Some analysts are warning from the impact of the rising crude inventory bubble, what do you think?

A: Some are concerned that countries or companies could start selling their growing oil inventory. I do not think this will happen, especially if the forecast is that oil prices will increase. Higher prices in the future will offset the cost of storing oil.

Q: Wood Mackenzie expects oil companies to reduce investment by 22 percent or $740 billion between 2015 and 2020, and it could reach $1 trillion. Do you think this would cause a “price shock” if demand grew, while production growth stopped or slowed?

A: I think such figures are greatly exaggerated and inaccurate. Maybe Mackenzie didn’t take into consideration state-owned oil companies in different countries that plan to invest billions of dollars.

Even if there was a huge drop in investment in oil, it would have an impact after 2020 and we can’t call it “price shock” with the expected decline in global oil demand growth.

Q: What’s your own forecast for oil prices in 2016 and 2017?

A: The price levels this year, next year and probably the next three years won’t exceed $45-55 a barrel. There is a fundamental weakness in global oil demand, coupled with weak global economic growth, while global oil supply is increasing.