Brent crude and West Texas Intermediate (WTI) fell 2 and 3.3 percent respectively to start the week and Saudi Arabia is prepared to go much lower in a bid to trim the fat. Oil Minister Ali al-Naimi said as much in an interview with the Middle East Economic Survey on Monday. Naimi defended the Saudi position and made clear that OPEC nations will not cut production at any price. His comments dismiss any notion of collusion with the United States and spell trouble for producers everywhere.
Since its November meeting, OPEC production has remained relatively steady while trending upward. Libya has had a few slip-ups and Venezuelan production is hurting, but the 12-member cartel exceeded their collective target for the sixth straight month, pumping 30.56 million barrels per day (mbpd). The price however, has fallen roughly 20 percent in that period and shows no sign of returning to its June highs.
For its part, Saudi Arabia accounts for nearly one-third of current OPEC production, or approximately 9.86 mbpd in the month of November. Still, production capacity is nearing 12 mbpd and Naimi suggested the oil-rich nation might put it to use sooner rather than later. It’s all part of a plan to demonstrate that high-efficiency producing countries deserve the greatest market share – an idea Naimi describes as the operative principle of all capitalist countries. OPEC produces around 40 percent of global output, but non-OPEC production is projected to grow 2.3 percent next year after a 3.5 percent expansion this year.
Naimi’s argument obviously ignores the significant geopolitical factors present in oil trade, but is nonetheless a worthy defense. Among the non-OPEC low-efficiency producers, Saudi Arabia aims to squeeze out Russia – who they mentioned specifically – and particular plays across North America, where non-OPEC growth has been most rapid.
In Russia, President Vladimir Putin and Rosneft head Igor Sechin project calm despite the downward march of nearly every significant indicator of economic health. As the government searches for solutions to the ruble’s disastrous final quarter, Russia’s five leading oil exporters are under orders to sell part of their foreign exchange revenues in the next few months. The EIA predicts Eurasian production will see a drop of approximately 100,000 barrels per day (bpd) into next year. Energy Minister Alexander Novak has yet to revise his production outlook, but admits oil exports will decline by 4.3 percent in 2015.
In North America, efficiency is not really the name of the game. In 2013, US shale accounted for approximately 20 percent of world oil investment while supplying only 4 percent of global production – numbers Naimi would deem unworthy of a market share, even if that market is domestic. The side effects of oil’s decline are less evident to date, but that is not to say they have been completely absent. Despite overall growth, the EIA has lowered its expectation for US production in 2015 by 100,000 bpd. Layoffs are already underway at Halliburton and more are expected elsewhere. In all, US exploration and production spending is projected to fall by more than 35 percent if WTI averages $65 per barrel or below into 2015.
North of the border, Canada believes it can weather the storm. The oil sands, while more capital intensive up front, operate on much longer timelines than shale projects and those already online can breakeven at $40 per barrel. Even so, a handful of Canadian oil companies are slashing their 2015 capital budgets and reducing output forecasts.
It’s unclear whether or not OPEC and Saudi Oil Minister Naimi are simply trying to put a scare into markets long enough to defend their market share – and if they can even keep up in this game of chicken – but the scare is there and the advantage is theirs.