The U.S. is producing more oil than ever, but when it comes to pulling the strings of the market, Saudi Arabia is still king.
Oil is flowing from shale fields at a record pace, propelling U.S. output to roughly double in a decade. That remarkable growth had led some observers to pronounce the U.S. the new swing producer in the market—a mantle long held by Saudi Arabia.
Yet with prices rising to their highest levels since 2014, the Kingdom still holds the power to single-handedly respond much more quickly than hundreds of private companies spread from Texas to North Dakota.
In the latest sign of Saudi Arabia’s sway, energy minister Khalid al-Falih said Friday that the Organization of the Petroleum Exporting Countries and its allies are likely to open the taps to address rising prices after their production-cutting pact and threats to supplies from Venezuela and Iran helped push global oil prices to $80 a barrel this month.
That news sent Brent prices falling nearly 3%, while U.S. crude prices promptly shed 4%—the biggest one-day percentage drop since July. On Monday, Brent continued falling, losing 1.5% to $75.30 a barrel.
Saudi Arabia’s clout stems from an abundance of spare capacity. The Kingdom is capable of producing as much as 12 million barrels a day, though it has kept its output much lower due to the OPEC deal. Its ability to open or close those taps almost overnight enables Riyadh to influence price movements more than any other producer.
U.S. shale companies are much more nimble than oil giants that rely on more cumbersome and time-consuming methods such as offshore drilling. But shale still needs several months of lead time between a change in price and a tweak in output—and that is a decision made by corporate bosses rather than politicians.
“Several years ago everybody who loved the ‘Shale is Superman’ story would have said we’re never going to be in that situation again—we’re never going to have to go to the Saudis with an oil ask,” said Helima Croft, global head of commodity strategy at RBC Capital Markets. “Yet here we are.”
Saudi Arabia’s status as the world’s swing producer and de facto leader of OPEC bestows it with an outsize role in the global economy, which remains highly sensitive to the price of oil. By curbing supply, the Kingdom can boost prices at the pump, stoke inflation world-wide, and cause transportation companies’ costs to soar. Or it can offer relief by releasing more crude.
Saudi Arabia has adapted to the rise of shale by partnering with Russia. The world’s two biggest exporters have only rarely cooperated, often viewing each other as rivals. But after prices fell to less than $30 a barrel in 2016, OPEC clinched a deal with Russia and other producers to cut around 2% of global output.
Even some U.S. oil executives who had belittled OPEC’s role in stabilizing prices have come around. Harold Hamm, the chief executive of Continental Resources Inc., said in 2016 “we and other producers have made OPEC policy less relevant to the world’s energy markets.” But earlier this month, he credited OPEC’s production cuts with helping work down the glut that had weighed on the market.
Since the price shocks of the 1970s, the U.S. has leaned on the Saudis, trying to coax them to use their influence to keep prices stable—with mixed results.
Former U.S. Energy Secretary Bill Richardson said he used to fly all over the world to meet with then Saudi Oil Minister Ali al-Naimi to try to sway him to adjust production up or down to balance the market. In 2000, Mr. Richardson lobbied oil ministers for a production increase after prices more than doubled in a year.
Back then, Mr. Naimi was the “benevolent dictator” of the oil market. “The Saudis controlled OPEC and they controlled oil prices,” he said in an interview.
Saudi Arabia has rejected the status of a swing producer, but it has often acted like one. Then, in 2014, OPEC surprised the market by declining to cut output and halt sliding prices. Some analysts interpreted the move as the Saudis trying to squeeze U.S. shale out of the market, before OPEC reversed course when it agreed in late 2016 to cut production.
Analysts said the move was a sign that OPEC had “blinked” after failing to fend off shale. Some predicted it was too late for the cartel to regain relevance after retreating from the market for so long and that resilient U.S. producers were ready to pounce on any increase in prices and cut nascent rallies short.
But nearly a year and a half after it took effect, OPEC’s production deal has helped fuel a more than 30% rise in prices, allowing the group, and particularly its de facto leader, to reassert itself.
While U.S. producers have ramped up quickly, growing pains in the shale patch—from crowded pipelines in West Texas to investors asking companies focus on profits rather than barrels—have raised questions about whether they can take the reins of the market.
“The U.S. secretary of energy can’t just give the signal and regulate output the way Saudi leaders can,” said Daniel Yergin, vice chairman of IHS Markit.
With higher crude prices now threatening to boost inflation and trip up a global economic upswing, pressure had been building on the Kingdom to pull back.
Four Democratic senators called on President Donald Trump in a letter last week to “leverage your personal relationship with Saudi Crown Prince Mohammed bin Salman to urge Saudi Arabia to use their swing capacity to increase world oil supplies” ahead of summer driving season.
Still, some say OPEC’s success was due to good timing as much as anything.
“Last year everything went right for the producers [under the deal],” said Robert McNally, president of Rapidan Energy Group. “The effectiveness of Saudi Arabia as a swing producer when spare capacity is low and geopolitical risk is high is limited.”