The low prices for crude are costing Saudi Arabia some serious cash. The Saudi central bank reported last week that its net foreign assets fell 4.7% year-over-year in March to about $691 billion, their lowest level since July 2013.
The Saudis nicked their savings account to the tune of $36 billion in the last two months as the country’s new king has had to increase both withdrawals and borrowing to meet the kingdom’s public-sector salaries and large development projects according to a report in the Financial Times.
One analyst firm has said that crude oil output from OPEC countries in April rose by 125,000 barrels a day month-over-month to 30.9 million barrels a day, with most of the increase due to higher Saudi production. OPEC production averaged 1.2 million barrels a day more year-over-year compared with the two-month March-April period in 2014.
And that level of production is not expected to drop as the Saudis continue to preserve their market share by boosting production and lowering prices in an effort to stem U.S. production. The eventual outcome remains in doubt, of course, but it is difficult to ignore a combatant with a war chest of nearly $700 billion.
But it’s still early innings in the latest oil game. Spot prices have risen by about $20 a barrel while futures prices are up only about $4 to $5 a barrel. Why spot prices are rising when supply is also rising has more to do with geopolitics than oil demand and supply. The forward curve is flattening out and prices out to 2017 remain in a range of around $70 to $75 a barrel for Brent crude oil. The current December 2017 price for WTI is $65.70.
At that level, all things equal, most North American production would at least break even. If technology improves in the next year or so, that level would generate a modest profit. And if prices for Brent crude do in fact hover around $75 a barrel, global demand for crude will likely increase.
However, if Brent rises much above that level, production that has been restrained will be turned loose and the price will fall again. If Brent cannot sustain a price of around $75, producers will be forced to reduce capital spending and demand is likely to rise too much, too fast.
The Saudis’ impact on the futures price depends to a large extent on how high a price they are willing to pay to maintain market share. We could be about to enter the third inning of what promises to be a long game.
marko on Mon, 4th May 2015 12:16 am
This doesn’t have any sence to me. I red an article yesterday. Buffet is confused, how is possible to make money from thin air , and not to cause inflation. I felt releif I am not the only one who doesn’t understand. The same to this story, I don’ understand
shortonoil on Mon, 4th May 2015 12:54 pm
We have heard that shale can breakeven at $56/barrel, now we are hearing $75. At between $95, and $100 the industry piled up a $1 trillion in debt, on $360 billion in annual sales. Guess this must be the new definition of breakeven?
The world is now in an affordability crisis that can only be relieved by a substantial reduction in production:
“Add in syndicated bank loans and total borrowing by the oil-and-gas sector rose to $2.5 trillion at the end of 2014, up from $1 trillion of outstanding debt at the end of 2006, according to the Switzerland-based Bank for International Settlements. It has warned that an “oil-debt nexus” could create a vicious circle whereby overindebted companies pump more oil to ensure they can pay interest on their loans, adding to the current global oil glut, and further depressing energy prices…”
Most of the world’s high cost producers will have to be shut-in before this curve bottoms out:
http://www.thehillsgroup.org/depletion2_022.htm
Whether or not Saudi Arabia cuts a million here, or a million there is irrelevant. Saudi Arabia won’t, and probably can’t reduce production significantly enough to affect what is occurring. The recent price decline has reduced the oil industry’s revenue stream by $1.3 trillion per year, and overall it is obviously working in the red. To bring it back to breakeven will require a lot more reduction than any single oil producer could accomplish!
http://www.thehillsgroup.org
Nony on Wed, 6th May 2015 6:46 pm
They would be tapping the wealth fund even more if they withheld supply. The price of oil is forward looking. And the market has determined that shale has “legs”. It’s a competitive market at least down to some marginal shale barrels.
Basically the situation is almost the opposite of what Hamilton said, hundred dollars NOT here to stay and OPEC part of the 100 dollar previous situation, but not relevant (above that marginal barrel, say 70) now.