Saudis’ bold gambit on oil prices pays off just three months later

Three months after Saudi Arabia made clear it was going to let oil prices keep tumbling, the strategy is showing signs of working.

U.S. drillers are idling rigs at a record pace, gutting investment plans and laying off thousands of workers.

Those steps highlight how the Saudiled Organization of Petroleum Exporting Countries (OPEC) decision in November to maintain output levels and protect its market share is having the desired effect — pushing prices down so far that they threaten to curb output in the U.S. and other non-OPEC countries. Saudi Arabia, the most powerful member of OPEC, will maintain that tack when the group next meets in June, according to some of the world’s biggest banks.

“OPEC giving up on trying to control the price is working,” Francisco Blanch, head of commodities research at Bank of America Corp. in New York said by phone. “It is having the effect that we would expect, which is a decline in investment and ultimately supply, and somewhat higher demand. We think this change is for good.”

The number of rigs drilling for oil in the U.S. dropped by 37 last week to 1,019, the fewest since July 2011, data from Baker Hughes Inc. showed Feb. 20. Since Dec. 5, a total of 556 have been taken out of service. Oil explorers including Royal Dutch Shell Plc and Chevron Corp. have announced spending cuts of almost $50 billion US since Nov. 1.

Transocean Ltd., the world’s largest offshore driller, had its credit rating cut to junk this week by Moody’s Investor Service on concern the company will increase debt levels while the drilling market deteriorates. It has about $9 billion of borrowings.

Oil has rebounded 10 per cent in New York since Jan. 29, following a drop of more than 50 per cent from June, in part because of the decline in drilling, which signalled supply growth will slow.