the saudi project

theeconomist |  STAGE one of Saudi Arabia’s plan—or perhaps hope—to restructure the oil market is taking longer than expected. By refusing to rein in production while prices fell, the Saudis permitted a big surplus to grow and served notice on higher-cost rivals (Russia, Venezuela, American shale-oil producers) that they would not prop up other people’s profit margins at the expense of their own market share.

That signal has been weakened by the growing amount of oil in storage, which is absorbing most of the glut. World oil stocks rose by about 265m barrels last year and Société Générale, a French bank, reckons they will increase by a further 1.6m-1.8m barrels a day (b/d) in the first six months of this year, adding roughly 300m barrels to the total. Oil is being stored in the hope that demand and prices will pick up later. Such restocking, plus renewed political worries (flows from Libya’s largest oilfield were disrupted again this week by apparent sabotage), have pushed the price of oil back up. After having fallen by more than 60% since June, the price of a barrel of Brent crude closed at $59.96 on February 18th.

The restocking cannot continue for long. Storage facilities in Europe and Asia are already 80-85% full. Much more and they will overflow. As it is, companies are renting tankers to keep oil in. If storage space runs out, prices could tumble again.

Whether that happens depends on how quickly phase two of the Saudi plan gets under way. This is to force high-cost producers out to increase the influence of Gulf countries. At the moment, this is happening only slowly. Oil types have recently become obsessed with the so-called “rig count”—the number of drilling rigs operating in America and elsewhere. Analysts think that as the rig count declines, shale-oil output will fall, hurting profits and investment. That seems dubious.

Figures from Baker Hughes, an oil-services company, showed that the rig count in America in mid-February fell to its lowest since 2011, and was 35% below its peak in October 2014. That is a big fall. But most of the idled rigs are in marginal areas; the fall has been only 9% in the main shale-oil basins, in North Dakota and Texas, which accounted for four-fifths of the increase in American oil output in the past two years. Moreover, productivity is rising in the remaining wells. Citibank reckons that even a 50% fall in the rig count would allow output to rise this year and turn the average shale firm’s cashflow positive, encouraging investment.