It looks like the OPEC policy of maintaining production to keep oil prices low is working. US shale oil producers, who were quite resilient for a while, are now being wrung out of the market.
Meanwhile, as Iran re-enters the market in a big way, Oil prices look to continue low. Can Saudi and other economies stand the strain? And what happens to high cost producers like the Alberta Tar Sands?
After a year suffering the economic consequences of the oil price slump, OPEC is finally on the cusp of choking off growth in U.S. crude output.
The nation’s production is almost back down to the level pumped in November 2014, when the Organization of Petroleum Exporting Countries switched its strategy to focus on battering competitors and reclaiming market share. As the U.S. wilts, demand for OPEC’s crude will grow in 2015, ending two years of retreat, the International Energy Agency estimates.
While cratering prices and historic cutbacks in drilling have taken their toll on the U.S., OPEC members have also paid a heavy price. A year of plunging government revenues, growing budget deficits and slumping currencies has left several members grappling with severe economic problems. The fact that the U.S. oil boom kept going for about six months after the group’s November decision also means OPEC has so far succeeded only in bringing the market back to where it started.
“It’s taken a hell of a long time and it will continue to take a long time — U.S. oil production has been more resilient than people thought,” said Mike Wittner, head of oil markets research at Societe Generale SA in London. “The bottom line is the re-balancing has begun.”
OPEC abandoned its traditional role of paring production to prevent oversupply last November as a tide of new oil from the U.S. eroded its share of world markets. The group chose instead to keep pumping, allowing the subsequent price slump to squeeze competitors with higher costs. The group didn’t discuss capping output when its representatives met in Vienna Wednesday with non-member countries including Russia.
Saudi Arabia may run out of financial assets needed to support spending within five years if the government maintains current policies, the International Monetary Fund said, underscoring the need of measures to shore up public finances amid the drop in oil prices.
The same is true of Bahrain and Oman in the six-member Gulf Cooperation Council, the IMF said in a report on Wednesday. Kuwait, Qatar and the United Arab Emirates have relatively more financial assets that could support them for more than 20 years, the Washington-based lender said.
Saudi authorities are already planning spending cuts as the world’s biggest oil exporter seeks to cut its budget deficit. Officials have repeatedly said that the kingdom’s economy, the Arab world’s biggest, is strong enough to weather the plunge in crude prices as it did in similar crises, when its finances were under more strain.
But the IMF said measures being considered by oil exporters “are likely to be inadequate to achieve the needed medium-term fiscal consolidation,” the IMF said. “Under current policies, countries would run out of buffers in less than five years because of large fiscal deficits.”
Reserve Accumulation
Saudi Arabia accumulated hundreds of billions of dollars in the past decade to help the economy absorb the shock of falling prices. The kingdom’s debt as a percentage of gross domestic product fell to less than 2 percent in 2014, the lowest in the world.
The recent decline in the price of crude, which accounts for about 80 percent of Saudi’s revenue, is prompting the government to delay projects and sell bonds for the first time since 2007. Net foreign assets fell to the lowest level in more than two years in August, with the kingdom fighting a war in Yemen and avoiding economic policies that could trigger social or political unrest.
The big companies in the tar sands are committed to keep on spending in the hopes of getting revenue to pay for the investments that have already been made. As long as they can continue to support the loan payments to the banks, then there isn’t a problem.
As soon as they first start to fail to pay,that’s when you’re going to be looking at possible bank runs and jumping bank managers. (well, with the modern office buildings and the lack of windows that can be opened. The bankers might not be jumping the next time the market crashes.)
If you’ve ever played musical chairs…