Tag Archives: Saudi Arabia

U.S. Shale Tempers OPEC Deal Optimism – 12/28/16

After a period of low oil prices devastated its member nations, OPEC will start cutting collective oil output to 32.5 million b/d in January. With 11 non-OPEC producers reducing their own output by an additional 558,000 b/d, one might predict prices to rise fast and high. However, the threat of a revival in shale oil output from the U.S. is keeping a lid on expectations.

The main proponent of the group’s original pump-at-will policy that led to the glut, Saudi Arabia is now facing massive revenue shortfalls. The deal to cut global supply – if involved producers follow through on their promises – would probably give the largest OPEC producer a chance to catch its breath.

Saudi officials have justified their previous strategy using the decline in U.S. shale output, a major win in their fight to maintain market share. Yet, they may soon be faced with the harsh reality that shale is going anywhere. In its Short-Term Energy Outlook for December 2016, the EIA said that “oil production, particularly in the United States, has been more resilient in the current oil price environment than had been expected, as reflected in improving financial conditions at oil companies”.

And now that OPEC is expected to finally push for higher oil prices, the shale patch is benefit as much, if not more so, than OPEC members.

Oil rig counts from the U.S. have been steadily rising since the OPEC deal was announced. In 2016, the Permian basin play has seen acreage prices balloon despite crude oil prices remaining close to 50% of what they were 2014.

In late 2016, companies paid higher than $40,000 an acre for drilling leases, roughly eight times what similar leases sold for in 2014.

Still, there are some variables that could shock markets which are worth noting: Will OPEC stick to promised cuts? (probably not) Will those cuts rebalance the market at some point next year? (most would say yes) How fast will U.S. shale rebound when prices do go up? (almost certainly before the end of 2017)

The promise of production cuts has so far barely moved prices from the $50 per barrel mark, largely because the specter of shale production is keeping expectations in check. Oil price predictions coming from major analyst groups are generally in the $50-$60 range for 2017 and, no matter what spin people try to put on it, those are not good numbers for OPEC.

OPEC Deal Likely to Fall Short – 12/14/16

The OPEC deal will bring oil prices up, but looks set to fall short of stated goals.

OPEC data shows that, throughout 2017, record oil inventories change little unless both OPEC and non-OPEC producers complying with supply restrictions in full. On paper, OPEC’s supply deal could drain almost half the global oil glut within six months. According to Bloomberg calculations using data IEA data, over the six months covered by the deal, 46% of the 300 million-barrel stockpile surplus could be cleared.

However, OPEC’s actual track record shows only 80% of promised cuts actually occur and Ali Al-Naimi, the former Saudi oil minister, has said OPEC members “tend to cheat.”

Non-OPEC nations have every reason to cheat on the deal and gain market share by pumping more. Benefiting from higher prices and more sales is a powerful incentive to put in minimal effort and call it compliance. For example, involuntary declines from aging fields are expected for most oil producers after years of heavy production which could be regarded as cuts.

In the 80% compliance scenario typical of most OPEC deals, non-OPEC rivals would need to make 600,000 barrels a day in genuine cuts to make a significant dent in global oil stockpiles in 2017. Reaching that number seems unlikely.

Exempt OPEC members Libya and Nigeria, as well as reluctant ones like Iran and Iraq already threaten to prevent substantial output declines. And the most crucial of non-OPEC producers, Russia, has a spotty record of following through on pledges to OPEC. When the effectiveness of the deal depends on Russia reducing output by as much as 300,000 barrels a day, its so-so history of cooperation doesn’t inspire much confidence.

Oil prices may rise as traders see any cooperation as a good sign, but cracks are already forming in the OPEC deal.

OPEC Approves First Deal to Cut Output in 8 Years – 11/30/16

OPEC successfully agreed to some crude oil production cuts for the first time since 2008 yet the effect it has on oil prices will likely be minimal.

Oil traders and investors may cheer the deal to curtail oil production, but history shows implementation of such agreements is often imperfect. In this case, exemptions have already been granted to Iran, Nigeria, and Libya making the collective target for the group all but unreachable if those nations boost output as planned. OPEC is also relying heavily on a reduction from producers outside the bloc of 600,000 barrels a day, half of that cut coming from Russia which has produced mixed results in the past.

Even with full compliance with the quotas by OPEC and non-OPEC, Goldman Sachs expects oil prices to only rise to about $60 a barrel. Other analysts from Morgan Stanley and Wood Mackenzie similarly see prices staying in the $50 to $60 a barrel range at best.

While 20% increase in oil prices would definitely improve the financial situation of oil drillers, it pales in comparison to 2014 prices that reached above $100 a barrel. It also risks reviving the competitors that OPEC hoped to force out of the market: U.S. shale drillers.

Fracking has changed the marginal economics of oil forever. Fracking shale deposits to get at tight oil is dramatically faster and less capital-intensive than traditional oil drilling, which is why output of U.S. oil spiked in recent years. And the U.S. is likely to only produce more tight oil in the coming years, according to the EIA.

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Shale oil drillers may have been devastated during the last two years of low prices, but a revival in their output is inevitable once prices start rising again. And renewed production in the U.S. would effectively cap oil prices even if OPEC’s deal goes perfectly and make efforts to keep prices above $55 “self-defeating”, according to Goldman Sachs.

OPEC Deal: Problems for Before and After – 11/21/16

Even if a deal between OPEC members is reached, increased supply from Iraq and Iran threatens Saudi Arabia’s control over the group. Iran and Iraq both asked for exemptions from any cuts in the deal citing a need to recover from sanctions and a need to fight the Islamic State respectively.

Iraq and Iran have raised oil output to record highs. Together they produce more than 8 million barrels of oil a day, almost a quarter of the oil pumped by the group and nearly as much as Saudi Arabia, the group’s largest producer.screenshot-2016-11-25-at-7-19-54-pm

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The decision of whether or not to allow the exemptions was ultimately delayed to the meeting on Nov. 30, where OPEC ministers will work out a shared cut in production aimed at reversing a price slide that has devastated the budgets of oil-dependent nations like those in OPEC. Benchmark Brent crude fell from more than $115 a barrel in mid-2014 to less than $30 before rebounding to a still low $45-$50 range.

Both Iran and Iraq would benefit from the higher prices, but they benefit more if they were able to sell more oil while others cut back. While a special exemption might be necessary to make the deal work, it would leave Saudi Arabia to shoulder most of a collective decrease and sacrifice its market share for the sake of its two biggest OPEC competitors.

If there’s no agreement to restrict output, the International Energy Agency has said that oil prices are likely to fall in 2017. OPEC’s own estimates of supply and demand also show that even following through on the agreement would barely drain a record oil surplus without the cooperation of non-members like Russia.

No non-OPEC nations are likely to make substantial cuts to their output. Russia is producing at a post-Soviet era high and has repeatedly said it “prefers” a freeze to a cut. And participation from other major producers like the U.S. or Canada has never been realistic. The U.S., the only oil producer on par with Russia and Saudi Arabia for total output, in particular could cause trouble for the deal. It was the massive increase in U.S. shale oil production combined with lackluster global demand for oil that caused the glut in the first place. Should oil prices rise as intended, revitalized shale driller output will likely put a ceiling on how high they can actually go.

EIA Finds Resurgence in Offshore Oil Production – 11/1/16

Although onshore oil production gets more attention, especially after the surge in shale oil output that caused the recent price collapse, offshore oil continues to play a big role in oil’s future.

Globally, offshore oil production accounted for about 30% of total oil production over the past decade, according to the EIA.

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A significant amount of global offshore production is concentrated in a few countries. In 2015, 43% of all offshore oil production came from five countries: Saudi Arabia, Brazil, Mexico, Norway, and the United States.

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Saudi Arabia is responsible for 13% of the world’s total offshore production making it the largest producer of offshore crude oil followed by Brazil, which saw its offshore production grow by 58% between 2005 and 2015. Mexico and Norway have seen steady to falling production from offshore sources for the same time period.

The U.S. has seen relatively strong production in the Gulf of Mexico between 2005 and 2015 with offshore production gains of 6.5%. Several large projects coming online in 2016 and 2017, Gulf of Mexico production is expected to increase by about 100,000 b/d in 2016 and an additional 200,000 b/d in 2017. However, U.S. onshore production is expected to fall by 800,000 b/d in 2016 and an additional 300,000 b/d in 2017.

Advancements in drilling technology have also made previously unreachable deepwater prospects viable. Most offshore production is in shallow waters, but there has been a move toward deepwater projects. Still, the greater time and investment involved in deepwater projects has meant most nations with offshore assets operate only in shallow water.

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Global offshore oil production from deepwater projects reached 9.3 million barrels per day (b/d) in 2015, up 25% from a decade ago. Changing economics and the exhaustion of some shallow offshore resources has helped to push producers to deepwater resources, particularly in Brazil and in the Gulf of Mexico.

The majority of deepwater production occurs in four countries: Brazil, the United States, Angola, and Norway. Brazil in particular has significantly increased its deepwater production. While the U.S. has expanded operations in the Gulf of Mexico, Brazil has been focusing on presalt resources found under thick layers of salt at extreme depths of more than 1500 meters as illustrated by the rising share of its crude production coming from ultra deep sources.

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The OPEC Deal: A Last Gasp of Relevance? – 10/31/16

OPEC may have pushed oil prices above $50 with promises of their first production cut in eight years, but doubts remain about how effective a deal could actually be. Between bulging inventories, internal tensions, and a loss of market share relative to non-OPEC producers, even the largest cuts promised in the range put forth in September look relatively minor, as well as unlikely.

Still, OPEC members have been too shaken up by the price collapse for the group to take no action. And should the group have a repeat of Doha, where the talks collapsed over Iran’s part or lack-thereof in the cuts, the costs to the already battered economies of OPEC could be massive. Failure to finalize the deal could mean a return to prices in the low-$40s, according to Goldman Sachs Group Inc.

Of course, if OPEC does manage to implement the maximum cuts, then they would still need to wait for the record surplus to fall off.

The bloc’s own data show that, under the cuts, the excess held in stockpiles would fall just 11% next year. Should competitors — chiefly Russia and the U.S. — decide to increase production and take advantage of the situation to gain a higher market share, the deal could easily fall apart. Any deal not involving at least Russia would have a superficial impact.

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If OPEC reduces output by 900,000 barrels a day from September levels as agreed in Algiers, inventories would contract as a result; however, even within OPEC, countries are probably going to miss that target. Four OPEC countries claiming exemption from the deal — Libya, Nigeria, Iraq, and Iran — increased output by 450,000 barrels in October alone, according to a Bloomberg News survey of available data. Any increased output from those members would have to be matched by grudging cuts by other. Most extra cuts would probably be coming from Saudi Arabia which faces its own economic troubles and reluctance to sacrifice market share for the sake of a losing battle.

Cutting output by enough to achieve OPEC’s objective also hinges on non-OPEC producers, especially Russia, playing their part. Yet Russian officials have said at most refrain the nation would refrain from further increases, according to Interfax, and Russia has had mixed history when it comes to following through with agreements with OPEC.

Representatives from other major oil countries such as Brazil, Kazakhstan, and Oman are also hesitating to accept or outright denying any responsibility to cut their oil output. Officials from Oman have said the nation is willing to cut production as part of deal, but is waiting for OPEC to reach an internal agreement before deciding on its own cuts. Meanwhile, Brazil has publicly committed itself to boosting output by 290,000 barrels a day next year, the biggest increase of any non-OPEC nation, according to the IEA. Kazakhstan also plans to boost output next year following the restart this month of its Kashagan oil field after 16 years of development.

Should OPEC implement its deal, it will almost certainly mean some increase in oil prices. How much some means will depend heavily on how much stock investors put in the group’s ability to affect markets as it used to. As U.S. shale drillers return, threats to oil demand come in new and old forms, and so many more factors outside of OPEC’s control threaten its relevance, it’s hard to say how much longer markets will focus so intently on what the group does.

Saudi Arabia and the OPEC Deal – 10/17/16

To make production cuts work, Saudi Arabia was always going to need to pick up the slack from its “partners” in and out of OPEC. The real question is how much of a burden is Saudi Arabia willing to take on for the sake of the deal.

It is possible for Saudi officials to reach the 32.5 million to 33 million-barrel range they agreed to with the rest of OPEC using only the usual seasonal reductions, but only in the unlikely event that other countries don’t increase output. Add to the equation surprisingly tenacious and quick-to-recover U.S. shale drillers and the deal could get very raw very quickly for the Saudis.

With OPEC pumping just over 33.5 million barrels a day in August, reducing volumes to the upper end of the range set in Algiers would involve a reduction of 500,000 barrels. But if Nigeria and Libya both meet expected additions to their output, they could add a million barrels a day. Making up for that cut could be a bigger sacrifice than Saudi Arabia is prepared to make, especially given its reluctance to give up market share and its own economic struggles.

Low oil prices have devastated the world’s largest oil exporter. Austerity measures aimed at reducing a budget deficit of 16% of GDP in 2015 are already hurting consumption as the government had raised the prices of fuel and utilities. Such reforms will have long-term benefits, but in the near term will be undoubtedly unpopular and difficult to implement.

Saudi officials are also considering canceling more than $20 billion of oil projects to reduce capital spending. If capital spending this year is cut by 71% as expected, then the economy which has long relied on oil projects to drive non-oil economic activity will slow if not contract. Growth will likely slow to 0.6 percent this year from 3.4 percent in 2015, according to HSBC Holdings Plc.

So far, Saudi Arabia has said it will make the deal work, but it remains to be seen how dedicated the nation will be if others aren’t playing along.

Iran and the OPEC Deal – 10/14/16

In oil news, few events stir up more volatility than OPEC deal talks so the next few articles will be taking a look at the effects of such talks on some major stakeholders in the oil industry. This series will start with Iran.

Iran has essentially won an exemption from the production controls most other countries agreed to at the recent OPEC meeting. The nation will continue to increase its oil output after successfully arguing that it should be allowed to return production to levels achieved before US-led sanctions devastated its energy industry.

Although OPEC agreed on a new overall range for production and will set up a committee to decide on output quotas for individual members, the probability of a cap on Iran’s production is insignificant for a reason. Iranian officials have repeatedly said they will up production to regain the nation’s pre-sanctions share of the market. Relative to other OPEC members, Iran has little to lose by boosting production and undermining the price support. If anything, Iran welcomes the opportunity to win back some market share.

Iranian officials are seeking to increase output to about 4 million barrels of crude a day. Iran produced 3.62 million barrels a day in August, according to data compiled by Bloomberg.

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Yet, the country’s withered energy infrastructure and investment base will make the official goal difficult to reach. Without a larger influx of foreign capital and technology, something that could take years to happen in earnest, Iran is not recover this year.

Iran has begun the process of attracting foreign investors. National Iranian Oil Co. agreed to the framework of a $2.2 billion deal with Persia Oil & Gas Industry Development Co. aimed at increasing crude oil exports. Moderate forces in Iran, which need to show that easing tensions with the West is paying off, will continue pushing such agreements as they seek higher oil revenues. The oilfield development accord combined with rising crude exports suggests a positive trend for Iran’s oil industry.

Of course, a positive for Iran is often a negative for its regional rival, Saudi Arabia. Because Saudi Arabia is the largest producer in OPEC it is expected to make up for make cuts where others cannot or will not to keep overall production within the range the group agreed upon. Meeting that expectation means conceding market share.

Adding to the deal’s troubles are few other issues: Nigeria has also claimed exemption from any cap on its output as it recovers from militant attacks on its oil assets, Iraq has said it doesn’t accept OPEC’s estimates of its production levels, Libyan output is rising substantially, and Russia, with its history of not following through on similar deals, boosted output last month to a post-Soviet record. None of those issues will help the deal but, like Iran, those countries may be expecting Saudi Arabia to pick up the slack anyway.

The Labor Problem of Gulf Nations – 9/16/16

Citizens of Saudi Arabia, the Gulf nation leading the world’s oil production, have enjoyed the benefits of plentiful petrodollars and cheap foreign labor for decades as locals receive easy, well-paying public sector jobs and private firms hire foreigners to handle the real work.

The arrangement is common in countries of the Gulf Co-operation Council (GCC) – Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates (UAE). But as the price of oil stays low and the number of Gulf citizens entering the job market grows, the model is crumbling and Saudi Arabia will be the hardest hit. The nation already faces an unemployment rate of 11.6% and only 40% of adult citizens are in the labor force.

Part of the problem is that young Gulf citizens feel entitled to the same types of government jobs their parents had, ones with generous benefits and minimal duties. The other problem is weak demand from the private sector for Gulf nationals who demand higher wages and better treatment than laborers from abroad.

Some governments are trying harder to force private companies to hire locals by setting a minimum proportion of jobs to be filled by natives. Unfortunately, such quotas are wreak havoc on incentives. The work ethic of quota workers suffers – they know they likely won’t be fired since they weren’t hired for their skills in the first place – and employers, resenting being forced to hire those people, can end up cheating either by adding phantom citizens to payrolls, or by giving nationals low-wage, largely superficial jobs.

Of course, the drastic, boat-rocking reforms needed to correct the Gulf’s messed-up labor system are unlikely to appear when so much of the Middle East is still racked with conflict and leaders fear their country will be the next to descend into chaos. Still, cheap oil may make change unavoidable

Saudi Arabia and Russia: A Broken Record – 9/15/16

The world’s top two crude-oil producers, Saudi Arabia and Russia, pledged to cooperate to stabilize global markets, while failing to announce any real measures to bolster prices and raising the question of what, if anything, they actually hope to accomplish.

The Energy Ministers of Saudi Arabia and Russia have both agreed at a joint press conference that an output freeze would be the most effective way to  restore oil prices, but stopped short of pledging actual production limits. Saudi Arabia and Russia struck a similar agreement earlier this year, but it quickly fell apart in Qatar when the Saudis suddenly insisted that Iran take part.

Meanwhile Iran, continuing to ramp up output to return to pre-sanction levels, is unlikely to agree to adhere to any limits if asked again.

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Oil traders and oil officials are skeptical the pact will amount to much.

“Don’t expect anything of substance to be agreed on output at the Algiers meeting,” said Victor Shum, Singapore-based vice president at industry consultant IHS Inc. “It will be a non-event and any attempts to manage output won’t happen. It will be a dud but that’s not a surprise.”

“A freeze doesn’t resolve anything if Saudi Arabia and Russia are both freezing when their production is at a record high,” Saad Rahim, chief economist at oil-trading house Trafigura Group Pte, said in Singapore.

While it’s “easier” to have talks on freezing supplies now than it was at a meeting in Doha earlier this year, a deal is unlikely at a gathering in Algiers later this month, said David Fyfe, Gunvor Group Ltd.’s head of market research and analysis.

“There won’t be an agreement but it does no harm to keep talking about this because that itself is price supportive,” Fyfe said at the Asia Pacific Petroleum Conference in Singapore on Wednesday. “Of course, there’s a risk of crying wolf. But at some stage it’s the law of diminishing returns when you keep talking about a production agreement and not actually reach one.”

Their pessimism is understandable. OPEC members that can raise production are seeking to, the others are already close to short-term limits.

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Still, OPEC and Russia will probably keep at the same dance so long as prices go up whenever they suggest an agreement is coming, and likely after if only to keep up appearances.

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