Saudi Trip To Latin America Evokes 1990s Oil Troika With A New Rival: US

Some 15 years ago, a troika of powerhouse oil producers forged a secret pact to revive oil prices from a crisis-inducing low of near $10 a barrel. In a series of private meetings from Madrid to Cancun, ministers from Saudi Arabia, Venezuela and Mexico set aside months of acrimony to hammer out production cuts.

This week, Saudi Oil Minister Ali al-Naimi will make a rare visit to the two other nations involved in that effort. But veteran oil analysts see no sign of a new coalition in the making, despite some parallels to the late 1990s – a structural downturn in oil markets and talk of a price war among producers.

If anything, Naimi may simply seek to explain Saudi Arabia’s latest stance on the market, a tough message about how all big producers must be prepared to endure a period of lower prices in order to slow the march of their newest rival: the United States.

“I suspect that Naimi will tell the Venezuelans the unvarnished truth – prices have to go down quite a bit and stay down,” says Philip K. Verleger, president of consultancy PKVerleger LLC and a one-time adviser to President Jimmy Carter.

Oil prices have tumbled nearly 30 per cent since June, with U.S. crude falling below $80 a barrel on Monday, but the open hostility and panic big oil producers faced nearly two decades ago is largely absent. Even if Naimi were rallying support for action, Latin American producers struggling to maintain output would likely be his last stop.

“This (trip) is very much a sign of business as usual without any panic,” said Paul Horsnell, global head of commodities research at Standard Chartered Bank.

The visits may be an early indication that the three countries – once fierce competitors selling heavy crude into the premium U.S. market – are finding common cause facing the fast-emerging threat of North American shale and oil sands.

“There are some interesting changes and opportunities today given the fact that the United States has become a major light sweet producer,” said Amy Myers Jaffe, executive director of energy and sustainability at the University of California, Davis.

CLIMATE AND NATURAL GAS

The stated purpose of Naimi’s trips is benign: he will attend a climate change conference in Venezuela and a natural gas conference in Mexico. Naimi has long been the kingdom’s envoy to global climate talks, but he has not been to Venezuela since 2006.

But the visits will also afford a chance for Naimi – who was involved in the late 1990s talks – to explain the kingdom’s relaxed stance on oil prices to Venezuela, one of the OPEC members at greatest risk from falling crude revenues. It may be a precursor to more difficult conversations down the road.

Less than four weeks before the Organization of the Petroleum Exporting Countries meets in Vienna, there is no indication that the group’s core Gulf members are in any hurry to tighten the taps. Without a reduction in OPEC output or a sharp slowdown in U.S. shale production, some analysts expect prices to keep sliding into next year.

Officials in Venezuela and Mexico declined to say whether any direct discussions between oil officials were planned.

TOUGH TALK OR FRIENDLY CHAT?

Venezuelan officials have publicly lamented talk of a price war following Saudi Arabia’s move last month to cut export prices of its crude, seen by some as an indication that the world’s biggest exporter had shifted strategy toward defending its market share, even at the expense of lower global prices.

But that veiled criticism is a far cry from the open hostility between the two nations in the late 1990s, when Saudi Arabia sought to punish Venezuela for revving up output in excess of its OPEC quota by flooding the market – the last of several price wars within the cartel. Now Venezuela is fighting to keep output from falling.

“Right now if you wanted to get production cuts the last place you would go is Caracas or Mexico City,” said Nathaniel Kern, president of Foreign Reports in Washington.

Mexico, not an OPEC member, was enlisted as an “honest broker” to get the two countries talking, said Horsnell. Oil prices had tumbled 40 per cent after the Asian financial crisis of 1997.

In the end, Algeria’s oil minister acted as a go-between during months of cloak-and-dagger petro-diplomacy, involving unmarked jets, secret trips to Europe and, finally, a March 1998 output deal in a rented room at the Madrid airport.

Naimi’s trip shows that talk of a current price war is overblown, says Horsnell.