Last week, in the wake of S&P’s downgrade of Saudi Arabia [18] and an IMF report which suggests that a number of Mid-East producers will be broke in five years if oil prices remain where they are today, we brought you, i) an in-depth look at Riyadh’s financial situation, and ii) a glimpse at where exporters stand in terms of breakeven prices and budget deficits.
We encourage you to review the full account [19] of the Saudis' situation as Deutsche Bank does a nice job of illustrating what is becoming an exceptionally tenuous scenario, but we think it’s worth reposting the following two graphics here as they serve to underscore the deepening fiscal crisis:
[20]
As for who's hurting the worst, here's Deutsche's graphic on deficits in the world of "lower for longer":
Note that Oman is among those stinging from the dramatic decline in prices. Well on Monday, the country's oil minister Mohammed Bin Hamad Al Rumhy lashed out at OPEC for - and yes we're going to use this analogy again - Plaxico'ing itself. Here's WSJ with more [21]:
Discontent with the Organization of the Petroleum Exporting Countries spilled into the open Monday, when Oman’s oil minister called current oil production levels “irresponsible” and blamed the group for low oil prices.
“This is a commodity that if you have one million barrels a day extra in the market, you just destroy the market,” said Mohammed Bin Hamad Al Rumhy, whose country produces oil but isn’t a member of OPEC. “We are hurting, we are feeling the pain and we’re taking it like a God-driven crisis. Sorry I don’t buy this, I think we’ve created it ourselves.”
That would appear to be news to influential Saudi Oil Minister Ali Al-Naimi, who earlier this year told CNBC [22] that "no one can set the price of oil [because] it's up to Allah." Back to WSJ:
Mr. Rumhy’s comments came at a conference in Abu Dhabi as he shared a stage with Suhail al Mazrouei, the United Arab Emirate’s top oil official, who is a top advocate of the producer group’s strategy. The remarks also reflect the pressure on OPEC from less wealthy members like Venezuela and Algeria to intervene with production cuts to raise prices, as crude oil trades for less than $50 a barrel—down from more than $100 a barrel in 2014.
On the same day, OPEC’s Persian Gulf producers unleashed a broad defense of their decision to pump full throttle to keep their share of the market, less than a month before the group’s next meeting to decide whether to maintain or cut production.
Mr. Mazrouei defended OPEC’s stance, arguing that production cuts would simply subsidize higher-cost producers in the U.S. and elsewhere.
Yes, higher prices would "simply subsidize higher-cost producers in the US," although as the Saudis have learned over the course of the last nine or so months, the Fed is "simply subsidzing" US producers by ensuring that capital markets remain open to insolvent drillers. It's not as yet clear how long that's going to last, but at a certain point, one wonders whether OPEC might want to consider that if the cost of capital is going to remain low for the foreseeable future, then some of the competition is going to stay in business even with rock bottom prices, so it might be better to just throw in the towel on the whole "let's bankrupt everyone who isn't us" strategy and let the chips fall where they may. It's a cartel after all, so it's not like you can't reverse course again if the competition heats up later on down the road once the budget bleed has been stanched.
The production frenzy has occurred even as American output begins to decline. U.S. producers used hydraulic fracturing technology to foster a boom in crude supplies that helped lower prices, but those operations were generally much more expensive than projects in the Middle East.
In Doha, Prince Abdulaziz bin Salman, Saudi Arabia’s deputy oil minister, rejected the idea that the current period of low prices represents a fundamental lasting shift.
“A prolonged period of low oil prices is…unsustainable, as it will induce large investment cuts and reduce the resilience of the oil industry, undermining the future security of supply and setting the scene for another sharp price rise,” Prince Abdulaziz said.
“Just as the assertions, heard a few years ago—that the oil price would reach $200 a barrel—were proved wrong, so the recent assertion that the oil price has shifted to a new low structural equilibrium—will also turn out to have been wrong,” he added.
And he should know - his government controls prices.
“No one is happy with the current situation,” a Saudi oil industry official said. “The lower oil prices are lasting longer than initially expected and everyone wants the price to bounce back up soon."
Of course there are significant geopolitical factors at play here. The conflict in Syria pretty clearly demonstrates that Russia intends to work closely with the Iranians going forward on everything from military matters to energy. After all, Russia isn't in Syria for nothing and while there's a certain extent to which Moscow is using the war as an excuse to mark a triumphant return to the world stage, Vladimir Putin could probably care less about the perpetuation of Tehran's "Shiite crescent" unless it somehow serves to protect Moscow's energy interests. In that context, note that The Kremlin is using Tehran's influence in Baghdad to muscle the US out of Iraq. With Iran set to boost crude production as sanctions are lifted, and with Iraqi production hitting new record highs, it seems possible that Russia may be looking to exercise more influence over prices to avoid the type of scenario that occurred late last year when the Saudis decided to use crude to pressure Putin into giving up Assad. Indeed, the fact that Riyadh has now begun to go after [23] Moscow's European customers seems to indicate that the kingdom is well aware that a seismic shift may be in the offing. Consider the following from Citi:
The Syrian peace talks in Vienna are reportedly sputtering due to fractious relations between Iran and Saudi Arabia. If the talks fail, from oil markets’ perspective Syria will remain a festering source of geopolitical risk, but the more immediate impact will be to further reduce the possibility of any production cuts getting agreed to when Iran, Saudi and the rest of OPEC meet again in Vienna a month from now.
Iran’s oil minister Bijan Zanganeh has been publicly calling for other OPEC members to cut while broadcasting its plan to announce a 500 k-b/d ramp up at the coming OPEC meeting.
The battle for market share is already fierce, and the return of Iranian barrels is only going to make it more so as record output from Russia and Iraq continue to pressure Asian markets. Saudi market share has been slipping in the region even with a sanctioned Iran and high Chinese SPR purchases. Figures 1-4 show crude imports in Asia (China, South Korea, Japan and Taiwan) by source in % terms with the pattern appearing clear.
[24]
Saudi Arabia and Iran have been losing ground to Russia and Iraq. In 2011, Russia and Iraq accounted for 5% of crude imports with Iran and Saudi Arabia supplying 10% and 27% respectively. In August, Russia and Iraq’s share had climbed to 9% each, whilst Iran and Saudi Arabia accounted for 6% and 23%. Even more worrying is the slippage in volumetric terms, with Saudi exports to the Asian-4 totaling 3.2-m b/d in 2011 vs. 3.1-m b/d in Aug and Sept.
Right, but understand that even as both Iran and Saudi Arabia are losing Asian market share to Russia and Iraq, Tehran is closely allied with Baghdad and Moscow while Riyadh is not. That certainly seems to suggest that in the long run, the Saudis are going to end up with the short end of the stick.
Once again, it's the intersection of geopolitcs and energy, and you're reminded that at the end of the day, that's what it usually comes down to.