Saudi Arabia’s oil policy, unveiled just under two years ago, at the November 2014 OPEC meeting where it effectively splintered the OPEC cartel by announcing it would produce excess quantities of oil in hope of putting shale and other high-cost producers out of business has backfired spectacularly: not only has OPEC failed to crush the US shale industry, which as a result of increasing efficiencies, and debt-for-equity exchanges has seen its all in production costs tumble, making even far cheaper oil prices profitable (especially with the addition of hedges), not to mention Wall Street’s ravenous desire to buy any debt paper that offers even a modest yield allowing US oil producers to delay or outright avoid bankruptcy.
But while shale has avoided annihilation, it is Saudi Arabia that has been suffering. In “Kingdom Comedown: Falling Oil Prices Shock Saudi Middle Class“, the WSJ reports that “a sharp drop in the price of oil, Saudi Arabia’s main revenue source, has forced the government to withdraw some benefits this year—raising the cost of living in the kingdom and hurting its middle class, a part of society long insulated from such problems.”
The kingdom is grappling with major job losses among its construction workers—many from poorer countries—as some previously state-backed construction companies suffer from drying up government funding. Those spending cuts are now hitting the Saudi working middle class.
Saudi consumers in major cities, the majority of them employed by the government, have become more conscious about their spending in recent months, said Areej al-Aqel from Sown Advisory, which provides financial-planning services for middle-class individuals and families. That means cutting back on a popular activity for most middle-class Saudis: dining out.
“Most people are ordering less food or they change their orders to more affordable options,” she said.
We have previously documented the soaring interbank funding costs and plunging bank stock prices, but that’s just part of it: Saudi’s entire economy is suddenly collapsing. To boost state finances, Saudi Arabia cut fuel, electricity and water subsidies in December, after posting a record budget deficit last year. It also plans to cut the amount of money it spends on public wages and raise more non-oil revenue by introducing taxes. But in response to these moves, inflation more than doubled from last year to about 4% now, crimping consumers even more.
Making matters worse, Saudis are beginning to speak out about a sense of anxiety about the economy. “I think we are going through a difficult period,” said Emad al-Majed, a Riyadh-based pharmacy technician. “There will be suffering.”
Which is probably why as OPEC prepares for an “informal” meeting in Algiers this week, Saudi Arabia is now officially panicking and, according to Algeria’s oil minister is prepared to slash its production by as much as half a million barrels.
As Bloomberg reported, Saudi Arabia offered to cut its oil output to January levels, according to Algeria’s energy minister, as the group’s members seek ways to stabilize crude prices at talks this week in Algiers.“Saudi Arabia is ready to freeze production at the January level,” Boutarfa said, calling the offer “an interesting step.” Saudi Arabia pumped a record 10.69 million barrels a day in August compared with 10.2 million in January, data compiled by Bloomberg show.
Fellow OPEC member Algeria wants the group to cut its collective output by 1 million barrels a day, Boutarfa said.
However, for that to happen, Iran would have to agree to curb its output at current levels, which is precisely the intent of Saudi Arabia, which went into a production spree in the past few months, just so it can appear to be “generous” with its production cut offer which will keep the Kingdom’s output just shy of all time high supply, while impairing Iran’s ability to capture further market share, mostly in India, Japan and various other Asian importers.
The oil market is in a “much more critical” state than when the Organization of Petroleum Exporting Countries last met three months ago, and its members must seek ways to shore up crude, possibly by freezing or trimming production, Noureddine Boutarfa, said Sunday in an interview. Aside from the Saudis, producers have made additional proposals, he said later at a news conference, without giving details. OPEC ministers plan talks in the Algerian capital on Sept. 28.
What until recently was sound assurances that the global market would return to balance as soon as, well, a few months ago remains oversupplied by as much as 1 million barrels if not more. According to Bloomberg, more than 800,000 barrels a day of additional crude is flooding into the global market this month compared with August as Russia pumps at an all-time high and Libya and Nigeria restore disrupted supplies, according to statements from their ministry officials in those nations. The surplus will last for longer than previously thought, persisting into late 2017 as demand growth slumps courtesy of a suddenly plunge in Chinese teapot refinery demand, as well as a slowdown in Chinese imports to fill the country’s almost full strategic petroleum reserve, while supply – mostly out of the US – proves resilient, the International Energy Agency said. Tumbling crude has put financial pressure on OPEC members from Saudi Arabia to Gabon.
In fact, some calculate that even an 800,000 barrel cut would not be sufficient to bring the market back into balance.
Meanwhile, it is not just Saudi Arabia who is panicking: “The situation since the last meeting in June has worsened, the situation is much more critical,” said Boutarfa, who’s been involved in talks with Saudi Arabia and other members in the run-up to the meeting. “So it’s important to see what measures can be adopted in the short term and very short term to find a solution to this situation that isn’t helping any OPEC country.”
That said, it’s all up to Iran which however resolutely refuses to cut production knowing it can easily capture market share – from Saudi Arabia at that – even if the price of oil remains under pressure and capping maximum potential revenues.
Saudi Arabia and Iran, whose rivalry blocked a deal with other major producers in April, did not reach an agreement after two days of preparatory talks in Vienna, including a Saudi offer to pump less crude if Iran caps output at current levels, according to two people familiar with the negotiations. Saudi Arabia doesn’t anticipate any formal decision on supply in Algiers, a delegate familiar with its policy said.
The main difference between the Algiers talks and producers’ failed attempt to agree on a freeze in April in Doha is that Iran will be present for this week’s discussions, Boutarfa said. Iran is more concerned with its market share than with actual output levels, he said.
OPEC’s talks in Algiers will be informal but can be converted into an extraordinary meeting, which could result in a decision by the group, Boutarfa said.
While odds of a deal in Algiers are virtually nil, keep an eye on oil vol: with a barrage of “headlines” (mostly from anonymous Reuters “sources”) imminent, the only guarantee move is that oil will move dramatically higher and lower in the next three days.
penury on Sun, 25th Sep 2016 9:54 am
to badly misquote the Bard, “Sound and fury signifying nothing.”
denial on Sun, 25th Sep 2016 10:29 am
Yes!! Yes!! Oil going up!!! Yes! Yes! OIL GOING Down what a waste of time…..speculating oil price you will always be wrong at some point! You have to look at the big picture…and that is….
green_achers on Sun, 25th Sep 2016 10:45 am
Haw, haw, haw. “(E)specially with the addition of hedges…” Yeah, nothing better for increasing profitability than gambling on loss.
rockman on Sun, 25th Sep 2016 11:18 am
So the KSA is going to cut global oil production by 0.5% and in the process give up almost $700 MILLION in revenue per MONTH. At least until the price of oil increases, when/if that happens. And just a rerminder: don’t be confused when the MSM starts filling the headlines with reports of big increases/decreases in the “price of oil”. What they are talking about is what folks are betting the price of oil FUTURES (not the price of oil) will be in 30 days. Also good to remember that just as many $’s are being bet that this won’t be the price of those oil FUTURES.
shortonoil on Sun, 25th Sep 2016 12:31 pm
Saudi Arabia burned through 20% of its estimated $750 billion sovereign wealth fund in 2015. Prices will be worse in 2016 than the $48.67 WTI price of 2015. Of course, a 500,000 b/d reduction in production will do nothing to alleviate a market , that by our estimate, is 4.75 mb/d oversupplied. Others have placed that over supply figure as high as 10 mb/d.
The best that Saudi Arabia can do is to stall for time. The long term trend in prices, as we have noted for almost three years, is downward:
http://www.thehillsgroup.org/depletion2_022.htm
This will result in a continued deterioration for oil producers in general as we approach the end of the oil age. For the individual this will best be witnessed from the continual stress that will be experienced by producers. The US saw 170 bankruptcy filing for the industry in the first half of 2016, and we expect at least 500 in 2017. As the $1.9 trillion per year decline in revenues from its 2013 peak continues to hit the industry bankruptcies, M&As, and increasing debt load will become the norm. As we have previously stated shale, ultra deep water, arctic, bitumen, and extra heavy crude, being the highest energy cost products, will be the first fatalities. Sovereign states with the highest dependency on oil production to provide their GDP will be the most seriously affected. Many of them are likely to dissolve over the next few years.
The 150 year depletion cycle of petroleum production has reached a point were many producers can no longer command a price high enough to cover their cost. This can be seen in the fact that almost no new oil is being found to replace reserves that are now being extracted. Companies across the board have cut their E&P cost to the bone.
https://assets.bwbx.io/images/users/iqjWHBFdfxIU/icbkDFACM4iA/v2/-1x-1.png
The cycle of declining price, and ever growing inventories has now persisted into its third year. Petroleum’s capacity to sufficiently power enough economy to generate its own demand has now become very obvious. This declining capacity to fulfill its traditional roll as a primary energy source can only continue.
http://www.thehillsgroup.org/
Northwest Resident on Sun, 25th Sep 2016 1:23 pm
“announcing it would produce excess quantities of oil in hope of putting shale and other high-cost producers out of business”
Did SA ever make that announcement? Or is that a big propaganda lie repeated and propagated endlessly in the mass media echo chamber ever since 2014 to the point that it has eventually become “established fact”?
You’d think that the writers at ZeroHedge would be smart enough to know the difference. Guess not.
Apneaman on Sun, 25th Sep 2016 1:39 pm
NWR, ZeroHedge is simply following their mandate – filling angry sheeple skulls with the material they crave. Truth and accuracy have nothing to do with it. ZeroHedge is a for profit venture just like the MSM and just like the MSM they play upon their readers emotions. Not hard to do in an age of gullible, knee jerk, spoiled retards who have yet to experience even one moment of self reflection.
Unmasking the Men Behind Zero Hedge, Wall Street’s Renegade Blog
The veil is lifted on a secretive website.
“Profit Motive
Despite holding itself out as a town crier for market angst, transcripts from Zero Hedge internal chat sessions provided by Lokey reveal a focus on Web traffic by the Durdens. Headlines are debated and a relentless publishing schedule maintained to keep readers sated. Lokey said the emphasis on profit—and what he considered political bias at the site—motivated him to quit.
He pointed to the wealth of the Durdens as a factor. Ivandjiiski has a multimillion-dollar mansion in Mahwah, N.J., and Backshall lives in a plush San Francisco suburb—not exactly reflections of Pitt’s anticapitalist icon. “What you are reading at Zero Hedge is nonsense. And you shouldn’t support it,” Lokey wrote in an e-mail. “Two guys who live a lifestyle you only dream of are pretending to speak for you.”
http://www.bloomberg.com/news/articles/2016-04-29/unmasking-the-men-behind-zero-hedge-wall-street-s-renegade-blog
rockman on Sun, 25th Sep 2016 2:34 pm
NR – “Or is that a big propaganda lie repeated and propagated endlessly in the mass media echo chamber ever since 2014 to the point that it has eventually become “established fact”?”
Not just the MSM: it was a very common theme tossed around by many on this site. They now appear to have become the “silent majority”. But the Rockman was one of the few beacons of reality shining a light on that silliness. LOL.
Na na boo boo…I told y’all soooooooooo!
Anonymous on Sun, 25th Sep 2016 6:01 pm
“Saudi Arabia’s oil policy, unveiled just under two years ago, at the November 2014 OPEC meeting where it effectively splintered the OPEC cartel by announcing it would produce excess quantities of oil in hope of putting shale and other high-cost producers out of business has backfired spectacularly: not only has OPEC failed to crush the US shale industry, ”
Reading this, one can only conclude, ZH name is a bit of a mis-nomer.
How about
ZeroIQ
ZeroClue
ZeroFacts
Those all work. Much better fit. Seems like just about everyone knows there is an economic war being waged against Russia, Iran Venezuela, by the JewNited States. Well, everyone except ZH and rockman of course.
Davy on Sun, 25th Sep 2016 6:36 pm
“Chinese Contagion Risks Surge: Banks’ Reliance On Each Other For Funding Hits All Time High”
http://www.zerohedge.com/news/2016-09-25/chinese-contagion-risks-surge-banks-have-never-been-more-reliant-each-other-funding
“It’s getting increasingly more difficult for China to deny its massively overindebted reality. The latest striking confirmation that things in the world’s former growth dynamo are deteriorating rapidly, come yesterday from none other than PBOC advisor Huang Yiping, who during a speech in Beijing said that China’s “deleveraging isn’t making progress” and that the “high leverage ratio is becoming a big financial problem for the country” noting that the household leverage ratio has “surged sharply in China.” Adding something ZH readers have known for the past year, Yiping said that “mining and property sectors have the highest leverage ratio” in the country and while the M2/GDP ratio is “not the best gauge to measure leverage for China” he notes that the “leverage ratios in state-owned companies have kept growing since 2008.” None of this is a secret: one look at the chart below from the IIF according to which China’s gross leverage is now roughly 300% of GDP, confirms just that.”
“Worse, in a troubling report by SocGen from September 21, the French bank found that depository banks’ claims on the government are surging, up 80% and nearly CNY7tn yoy. As SocGen notes, the simultaneous and rapid rise in the PBoC’s claims on domestic banks has raised questions as to whether China is conducting a modified form of quantitative easing.”
rockman on Sun, 25th Sep 2016 6:40 pm
A – “…it would produce excess quantities of oil in hope of putting shale and other high-cost producers out of business has backfired spectacularly”.
For sake of argument let’s say the expectation that EVERY shale driller went under and not a single new shale well was drilled was actually fulfilled. But if that really was the plan they apparently ignored the obvious: all the additional new oil production would not disappear. It would deplete without replacement but would take years to cease producing. Time that would cost the KSA alone roughly $130 BILLION PER year in lost revenue.
And they would suffer a loss until oil prices increased to their previous highs. Highs that promoted the development of the shales in the first place.
Which is exactly why I argued all along that this was one of two reasons the KSA wasn’t responsible for the price crash. The second reason was even easier to imagine: nether the KSA nor any other oil seller can force a buyer to pay a price they can’t/won’t pay. The only control the oil producers have is how much oil they offer to sell. And given the demands for revenue virtually all producers chose to increase production.
makati1 on Sun, 25th Sep 2016 6:47 pm
Guys and ladies, EVERY website that posts articles is about money/profit . ALWAYS about money/profit. Nothing is not about money/profit somewhere.
What ads appear on the sidelines of Peak Oil? Facebook? Yahoo? Etc.
AS for ZH, I go there to read some of the articles rather than search them out on their separate websites as I used to do. Ditto for PO, Rice Farmer, Global Research, etc. I ALWAYS look at the author/source to determine slant/spin and likelihood of truth.
Truth is becoming extinct along with humans. It is rare and elusive. All we can get is a slightly fuzzy picture if we search and read from a wide variety of sources constantly. But all we really know is the part of the world we live in 24/7/365 and what is happening around us and in our own lives. All else are guesses based on propaganda, false flags, and our own prejudices and denials.
Chris Ohaguim on Mon, 26th Sep 2016 11:05 am
OPEC is completely neutralized by United States and other and other industrialized world. Cutting oil production will not have any effect on falling oil prices. The cut will even make shale oil to comfortably fill the gap by increasing production to frustrate the plan. The only solution is for OPEC Countries to think outside the box and stop the stale idea of using the demand and supply of oil to regulate prices. What OPEC nations should do is to boycott import from most of the industrialized nations for breaching the law of comparative advantage as a result of the emergency of shale oil. If we all join hands to stop consumption of foreign goods, the production capacity of the foreign companies will fall and the companies in their countries will begin to fold up for lack of export. consequently their unemployment will rise and their GDP will decline just like ours.We need to take active steps, we should not rely on their purchase of oil to develop our economy. let us reduce the import from these countries by simply refusing to consumes their goods officially. Not by devaluation of currency as this has not worked for import oriented countries like OPEC.This action will empower oil OPEC to negotiate our trade relations with any country that have our interest at heart. After-all all the monies we earn from oil end up with these advance countries through the import of their machines and other manufactures goods. With this action they will realize that OPEC can as well create recession for the oil importing counties by simply walking away from importing their products . By this oil importing nations will be compelled to change their policy on politics of global oil prices.OPEC should take the bold step and act now as time for remedy is running out and avert hunger for their citizens
Don W on Mon, 26th Sep 2016 2:34 pm
So basically it comes down to us or them. They prop up their middle class at the expense of our middle class. thank-you Senator Phil Gramm and his bought and paid for GOP and Democrat colleagues for screwing us like this!
Ken Mercks on Mon, 26th Sep 2016 3:50 pm
All I know is, if oil prices go back up, I go back to work. Bring it on !!!!!
Jack Rabbit on Mon, 26th Sep 2016 10:16 pm
Canada’s entire oil sector has been wiped out and all stocks demolished, all jobs in oil engineering and labor destroyed. Which country is next?
Annastayshia Onasis on Mon, 26th Sep 2016 11:16 pm
Opec is not your concern It is onwed by Annastayshia,me, and no one else and i would appreciate it if people would stop talking about things they know nothing about.