Saudi Arabia’s bold gambit paying off

The number of rigs drilling for oil in the US dropped by 37 last week to 1,019, the fewest since July 2011

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

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

Those steps highlight how the Saudi-led Opec decision on November 27 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 US and other non-Opec countries. Saudi Arabia, the most powerful member of the Organisation of Petroleum Exporting Countries, 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 US dropped by 37 last week to 1,019, the fewest since July 2011, data from Baker Hughes Inc showed February 20. Since December 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 since November 1.

Transocean Ltd, the world’s largest offshore driller, had its credit rating cut to junk February 25 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 14 per cent since January 29, following a drop of more than 50 per cent since June, in part because of the decline in drilling, which signalled supply growth will slow.