EDITOR: | November 28th, 2014 | 9 Comments

OPEC and Saudi Arabia show the world who’s the boss

| November 28, 2014 | 9 Comments

oilOil production will not be cut, as there was no formal revision of the 30 barrels a day  limit that was set in December 2011. OPEC, the Organization of Petroleum Exporting Countries, managed to surprise everyone, going further than anybody had truly expected in its adoption of a rather unlikely free-market inspired approach.

Indeed, the Organization made a rather explicit decision to shift away from cartel pricing and policies, entrusting the restoration of equilibrium in the oil market to supply and demand forces, affecting only minor price adjustments. The market responded accordingly and the already fast dropping oil prices, already at their lowest since 2010, were allowed to accelerate their descent such that the Brent to USD$ 70/barrel the descent to the point that the WTi (west Texas Intermediate) fell back below USD$ 70/barrel – Brent crude hit USD$ 72. It was only a month ago that OPEC considered price of USD$ 80-90 too low. These values are well below the OPEC desired minimum of USD$ 100/barrel. But if the Saudis will persevere in their strategy, there will be no way to reverse the trend soon. Venezuela, Iran and Russia (non OPEC, but attends summits as observer) were among the countries most interested in achieving production cuts to boost prices; however, there is a sense that the Saudis want to maintain crude oil prices at 80-90 dollars per barrel for one or maybe even two years.

The Saudi strategy is clear; the Kingdom is using oil as a geopolitical weapon because at these prices, several of its OPEC competitors/foes will suffer: Vladimir Putin’s Russia, which has been struggling under financial US and EU sanctions; Venezuela, which under President Nicolas Maduro, has been facing a worrying financial and currency crisis and of course Iran, the most important and dangerous player, from Saudi Arabia’s perspective, in the Middle East chessboard. Iran, had demanded production cuts to help it stop the hemorrhaging of its State coffers as it too faces the burden of international sanctions.  The Saudis have market share on their side with a daily production of 9.7 million barrels, representing nearly a third of the OPEC total of 30.5 million. The Kingdom wants to achieve an overall margin squeeze in order to emerge as the winner in the medium to long term by further increasing its share of global production and while ‘ruining’ some of its competitors. If the mood in Tehran, Moscow and Caracas isn’t especially cheerful today, oil tycoons in Houston and Calgary are also not very pleased.

OPEC and the shale oil and tar sands producers of North America could find full agreement in restoring the USD$ 100/barrel oil price floor; both committed to resist the collapse of oil prices. OPEC, however, has become very concerned by the seeming success of shale oil, which would certainly continue to experience long-term growth, eventually reducing the Organization’s market share by a couple of million barrels a day within a few years, despite growing demand of  1 million barrels day, on average, per year. Shale oil producers in the USA had at first welcomed the price challenge with Saudi Arabia. Last September when oil prices started to drop more dramatically, the US’s largest shale oil operators saw the lower prices as putting pressure on domestic competitors, dissuading newcomers, while ‘bragging’ about their ability to reduce costs and even accelerate, rather than slow down, the extraction of crude oil. However, nobody, it seems had expected oil to drop below USD$ 70. At this price, only the Saudis are laughing. The shale oil producers such as Continental Resources – the largest producer in North Dakota – has been left exposed to the risk of a possible further drop in oil prices because the Company had expected OPEC to push for cuts in order to push oil prices back up to at least USD$ 90 in the short term. Others like EOG Resources stated that they could still be profitable even if oil fell to USD$ 40; similarly, Chesapeake Energy raised its production target of 0.7% as costs of production fall. Yet the Saudis are not convinced by the American optimism.

OPEC Secretary General Abdullah al-Badri, last October 29, said he was convinced that 50% of American shale oil was already “out of business” and that the companies involved would soon close down because they bear much higher costs than OPEC producers. OPEC countries, moreover, are less concerned about the profitability of the wells than they are about the stability of their State budget or current accounts. Extraction costs are a secondary consideration and the Saudis are the best equipped to survive this ‘game’; if it can keep the price of a barrel at USD$ 70 or below, it will slow US production and possibly eliminate the political debate over the Keystone XL Pipeline, given that at such prices, it would not serve anybody’s interests.

At yesterday’s meeting, then, the Saudi minister did not want to contemplate making any cuts whatsoever to production, defying even the most optimistic predictions. Strategic interests and regional rivalries have doubtless influenced the “price war”, reflecting the virtual war that has been played out in the Syrian battlefield between Saudi Arabia and Syrian President Bashar al-Asad’s allies Iran and Russia. The outcome of the summit will have irritated several ayatollahs in the Islamic Republic. With oil prices continuing to fall and the growing burden of years of international economic sanctions, Iran’s coffers have become increasingly empty. Nevertheless, Iranian leaders share the same desire to slow down North American oil production as the Saudis, not wanting to lose market share in the face of growth in the US, the highest in recent years.

The goal would be to force Americans to curb production founded on shale oil. Iran is also aiming to hurt Canadian oil producers in the very Albertan backyard of Prime Minister Harper, who has been pursuing – inexplicably – an even ‘tougher’ foreign policy against it than the United States. The Alberta tar sands and shale oil are no longer competitive under 80 dollars a barrel (between 60 and 70 according to other calculations) and with low prices many manufacturers would risk bankruptcy. The fact that Canada initiated a cut in diplomatic relations with Iran in 2012 has worsened relations and made dialogue difficult. The oil tycoons in Calgary may want to have a little chat with Mr. Harper…As for Iran, the lower oil prices may add pressure on the ‘Conservatives’ to allow President Rowhani, a pragmatist, to make more concessions in nuclear talks with the US in order to reduce the pressure from sanctions. The lower oil prices also hurt jihadists of the Islamic State (selling Iraqi and Syrian oil on the black market obtaining at least USD$ 2 million per day).



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  • Rich Kauzlarich

    Russia not a member of OPEC.

    November 28, 2014 - 11:38 AM

    • Tracy Weslosky

      Obviously you misread — he said OPEC’s competitors and foes, at no time did he make this statement.

      November 28, 2014 - 12:59 PM

  • u4eah

    “Venezuela, Iran and Russia were among OPEC members most interested in achieving production cuts to boost prices;” ?? …I was not aware that (Russia was an OPEC member) ? …maybe a little more fact checking ?…http://www.opec.org/opec_web/en/about_us/25.htm

    – Too often it seems, I witness the accuracy of published information on this web-site either seriously challenged, or down-right debunked; with very little followup / explanation offered by said authors/publishers of that information; …If this web-site, and its numerous publishers wish to maintain credibility with their viewership/readership; then perhaps a much higher standard of accuracy and fact checking is in order before hitting the SEND button!
    – btw this is not meant to single you out Mr Bruno; …rather just my observation of a trend that seems to have taken hold.

    November 28, 2014 - 11:44 AM

  • Alex

    It is also bad news for rare earth market, neodymium is used as wind energy turbins, so the price of neodymium will decrease further because energy have to be competetive with energy from gas and oil.
    It means the new miners not able to get money from rare earth.

    November 28, 2014 - 1:15 PM

  • Alessandro Bruno

    Let me see if I understand correctly. I write about the risks and consequences of the OPEC decision no to cut oil production, presenting some complex geopolitical arguments, right down to the fallacy of Prime Minister Harper’s policies (which hurt his constituents, even as he parades worldwide as the defender of freedom), and you choose to comment on whether or not I know that Russia is not part of OPEC? Russia attended the summit with Putin himself and it is an OPEC observer, as well as an ally of Iran and Venezuela. There may have been some confusion, but if you read again, I did not say Russia is an OPEC member state. For that matter, Norway also attends OPEC meetings and the USA is a de-facto member if you consider its influence over Iraq.

    November 28, 2014 - 1:19 PM

  • Tracy Weslosky

    u4eah – InvestorIntel is very fortunate to have some of the most well educated and experienced writers in the space and this is why I love my job and we all work so hard. To attempt to cause injury to the editors or the site’s reputation is unacceptable. This content is complimentary to you, and you have a track record of being very complimentary to Jack Lifton and Christopher Ecclestone, and have written on this site since 2008. As the Publisher, our site’s editorial team has never been tighter, brighter or experienced; and so if you have an issue with anything — I dare you to disclose who you really are…but today, you are acting out of character and petty. If you would like a job as an editor, send me your resume at info@investorintel.com and put your money where your mouth is…

    Alessandro, thank you for the above. Tracy

    November 28, 2014 - 2:25 PM

  • hackenzac

    I thought that was a petty gripe. It was clear to me that you meant cartel players if not members. However, your headline, I don’t think so. The boss is the US. Putting Canadian tars sands out of business and burying the red herring Keystone XL is fine with me and even if marginal fracked oil slows down due to glut and falling prices, fracked gas is still gonna go bonkers. I welcome the Saudis taking it on the chin. They have it coming especially from the American quarter and hopefully US policy will catch up with the market soon.

    November 28, 2014 - 2:35 PM

  • nigel b


    i for one will not internet troll you but instead thank you for presenting exactly as you commented above: a very peculiar game of oil chess.
    American ingenuity always seems to win the day, but i could be wrong.

    November 30, 2014 - 5:55 AM

  • Evin

    Interesting times for sure, with the OPEC meeting. Saudi Arabia has something like 97% of its social program funding from from oil. Some folks suggest the reserves in the ground haven’t depleted 1 barrel in years and the reservoir reports continually show the number to be the same number unchanged from year to year while maintaining production. This is either a miracle of science or a new type of math that hasn’t made it to North America yet. beyond 2025-2030 these numbers are not likely sustainable as exports, the Saudis will need their own oil to fund these programs and run their own country.

    Over in North America We have drillers chasing offshore everywhere, arctic oil, shale oil, Oilsands, and we now have floating LNG, regular LNG and huge refineries like Qatar ready to ship LNG around the planet. We have Russia doing a $400B gas deal with China that was not transacted in USD, and we have Iran and others not friendly to the USD following suit. Now the Saudis are passing the swing producer baton to the USA, interesting and timely decision. It’s affected most drillers and shale players as of Friday already… on a different note

    There are as many as 60% of the USD floating around outside the USA. If the support for the USD is like a market share, the USD has lost 10% market share of the worlds reserve currency from 2000 when it was 70% to today where it’s around 60%, if it tips below 50% they may never get it back above 50%.

    What a strange thing to think about…Oil, USD, Gold and all these postures by different countries trying to save face in situations which they rely heavily on business partners whom have varying agendas.

    The vote by the Swiss today over repatriating gold could spark a shift in gold miners and gold companies, but they claim its a 30% probability of a yes vote…however all these low probability events are things that do have the potential to occur and it appears you can’t buy your insurance one day after you learn that you needed it.

    I think the Blue Chip Energy Companies who hold years and years of reserves behind pipe or in the ground are going to be in a once in a generation sale for the next few weeks if this persists.

    I cannot see things remaining so low for multi-years as the historical records suggest these bottoms seldom last more than a few quarters. Perhaps this time will be different, however picking the bottom if your time horizon for holding is 10-15 years is rather like a blip on a chart down the road, it might be prudent to wait for tax loss season which could be above average bargains this year and load up on the dividend payers that will be oversold due to the market adjusting to this Recent OPEC decision.

    If gold backed currency becomes a trend of the future, and the us currency gets weaker in relation to foreign currency then we are in for a volatile few years while things rebalance.

    The only thing weirder than the time we live in is this paper on the origin of hydrocarbons… which originally sparked off a heated debate in 1986 after drilling 10 miles into the Siljan ring attempted to prove the existence of nonbiological sources for hydrocarbons. This theory purported to doom OPEC back in the day.
    Makes for fun dinner party conversations, which may have been his real motivation.

    Abstract: The two theories of abiogenic formation of hydrocarbons, the Russian-Ukrainian theory of deep, abiotic petrole- um origins and Thomas Gold’s deep gas theory, have been considered in some detail. Whilst the Russian-Ukrainian theory was portrayed as being scientifically rigorous in contrast to the biogenic theory which was thought to be littered with invalid assumptions, this applies only to the formation of the higher hydrocarbons from methane in the upper mantle. In most other aspects, in particular the influence of the oxidation state of the mantle on the abundance of methane, this rigour is lacking especially when judged against modern criteria as opposed to the level of understanding in the 1950s to 1980s when this the- ory was at its peak. Thomas Gold’s theory involves degassing of methane from the mantle and the formation of higher hydro- carbons from methane in the upper layers of the Earth’s crust. However, formation of higher hydrocarbons in the upper lay- ers of the Earth’s crust occurs only as a result of Fischer-Tropsch-type reactions in the presence of hydrogen gas but is other- wise not possible on thermodynamic grounds. This theory is therefore invalid. Both theories have been overtaken by the increasingly sophisticated understanding of the modes of formation of hydrocarbon deposits in nature.
    Keywords: abiogenic


    What if we never run out of oil? Then we will need to stop worrying, and get on living. http://www.theatlantic.com/magazine/archive/2013/05/what-if-we-never-run-out-of-oil/309294/

    November 30, 2014 - 1:15 PM

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