Saudi Arabia has declared an end to its oil war with the US

New colossus.
New colossus.
Image: AP/Hasan Jamali
We may earn a commission from links on this page.

Two years after quietly declaring war on upstart US shale, Saudi Arabia says the need for the fighting is over. In remarks to journalists while on a US visit, Saudi Arabian energy minister Khalid Al-Falih said that the worldwide oil glut has vanished, signaling an end to Saudi Arabia’s strategy of flooding the global market with oil to try to put American drillers out of business.

The implication was that Saudi Arabia owned the victory. But a three-week-long resurgence of US oil drilling after 21 months of decline suggests that Saudi and the US fought to a draw.

Falih noted that a record volume of oil remains in storage in the US and around the world (paywall), built up during the glut, but once much of that is sold off, the kingdom can resume its traditional role managing supply and demand.

“We are out of it,” Falih told the Houston Chronicle. “The oversupply has disappeared. We just have to carry the overhang of inventory for a while until the system works it out.”

The Saudis went to war in June 2014 after a sudden, 4-million-barrel-a-day surge in US shale oil production. The surge put a fright into the Saudis, who saw that the OPEC oil cartel was losing its four-decade-long influence over global oil prices. As a result, they decided to sweat out US drillers by flooding the market and forcing down oil prices. When Russia did the same thing, oil prices plunged below $27 a barrel by March 2015, down from an average over $100 a barrel from 2011 through 2014. In trading today, Brent, the internationally traded benchmark, was as high as $50.90 a barrel.

Along the way, the low prices triggered a bloodbath in the US shale patch, and in Canada’s as well. As of the end of May, 81 North American oil companies had declared bankruptcy, according to Haynes Boone, an oil patch law firm. The number of oil rigs in service in the US plunged as well (see chart below), to 316 at the end of May from a peak of 1,609 in October 2014. Oil production plunged to about 8.7 million barrels a day from 9.7 million at the peak in March 2015. But the resurgence of oil prices has resulted in a turnaround in rigs, too–last week, they rose by nine to 337, according to Baker Hughes, an oil services firm.

Image for article titled Saudi Arabia has declared an end to its oil war with the US

With prices over $50 a barrel, more US oil appears to be on the way. In a June 22 note to clients, Citi analyst Edward Morse reported that there are nearly 2,000 drilled but not completely constructed wells in the US oil patch. With higher prices, companies will begin to bring those into production. Morse forecasts that those wells could bring US production back to 9 million barrels a day by this time next year.

Just three weeks ago, Falih had said that Saudi Arabia will not set price targets. But in his new remarks, he suggested that the kingdom would step in to manage supplies, which could add up to the same thing. “Despite the surplus in global oil production and lower prices, the focus of attention remains on countries such as Saudi Arabia which, due to its strategic importance, will be expected to balance supply and demand once market conditions recover,” he said.

“The question now is how fast you will work off the global inventory overhang,” Falih said. “That will remain to put a cap on the rate at which oil prices recover. We just have to wait for the second half of the year and next year to see how that works out.”