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Friday, December 12, 2014
As everyone has read, seen on the news, or heard about on the radio, the price of crude is down; while this may be a blessing to end users it is causing a host of problems for a number of entities around the globe. The drop in price has had quite an effect on exploration and production firms, drilling and oil service companies, and most importantly the budgets of producing countries around the globe. An example of hitting a producing country in the wallet would be Saudi Arabia, the leading producer of OPEC. The country uses its oil wealth to support its entire economy, and to break even its budget calls for $90 per barrel, despite the fact that its production costs are closer to one-third of that. Other OPEC members have even higher budgetary break evens and with OPEC’s basket of crude price coming in at $63.15 on December 10, their budgets are taking a big hit.
The cartel held its regular meeting on November 27 in Vienna and while the world was waiting to hear that they would rein in production, the members of the cartel could not come to a consensus, so they did nothing. In its latest report OPEC forecast a drop in demand during 2015, cutting its forecast for growth in global demand in 2015 due to a weaker outlook for Europe and Asia, and predicted higher supply growth from shale and other non-OPEC sources, although it qualified this by saying growth in shale may slow if prices did not pick up. “Should the current fall in crude prices continue over a longer period, it will impact the non-OPEC supply forecast for 2015, especially anticipated growth in tight crude,” OPEC’s report said.
Saudi Oil Minister Ali Al Naimi was not responsive to broad hints, if not outright calls stating that his country could turn prices around if it cut production. Al Naimi’s comments on the sidelines of an annual UN climate change conference in Peru maintained his previous stance of the market would straighten itself out. It is believed Saudi’s stance on production is directly related to the US’ growing shale oil production which has been cutting into its share of the market. It has been touted about that Saudi has launched a price war with US producers of shale oil, in hopes that if the price of oil drops far enough the economics of shale production will lead to the US producers abandoning their projects.
While this may be a quick fix for the Kingdom, other OPEC producers need the revenue that higher oil prices bring. While Al Naimi was not willing to entertain cutting production, Venezuela’s emissary to OPEC and the South American country’s foreign minister Rafael Ramirez, said that the group must act. Ramirez told Reuters earlier this year “that is our job. We want stability in the market and predictability.” Ramirez isn’t the only emissary that thinks an emergency meeting is needed. Algeria’s Youcef Yousfi said OPEC may hold an emergency meeting prior to its regularly scheduled June meeting. “We will continue our efforts through dialogue with OPEC and non-OPEC producers to remove a surplus estimated at 2 million barrels per day,” Yousfi said on state television when asked about the downward trend in prices. “We may hold an emergency meeting before June.”
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