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Oil futures CLZ5, -0.97% closed at a three-week low Wednesday on a rise in United States oil supplies, as investors ignored a meeting of OPEC and other top oil producers in Vienna. Output was over 10M barrels per day as of June 2015.
The depressed oil prices have come at a time when spending has gone up as many of these countries are grappling with regional violence and turbulence in financial markets. As the USA wilts, demand for OPEC’s crude will grow in 2015, ending two years of retreat, the global Energy Agency estimates.
While cratering prices and historic cutbacks in drilling have taken their toll on the United States, OPEC members have also paid a heavy price.
“There is bound to be a huge amount of pressure on the Saudis from 1 or 2 people at that meeting to look at this policy again”, said Ian Taylor, CEO of Vitol, which traded more than 2-B bbl of Crude Oil previous year. “The bottom line is the re-balancing has begun”. He argued that it would be possible for Opec to raise prices (within limits) even while raising market share.
The losses will accelerate next year with a drop of 390,000 barrels a day in annual average production to 8.86 million barrels a day. That’s partially because these countries don’t need sky-high oil prices to balance their budgets.
The pain has been considerable. But rather than signalling retrieval from conflicts that are a heavy burdern on their economy, thee Saudis have signed a US$11.5 billion deal to purchase military equipment from the United States.
“The budget deficit in Saudi Arabia does go down substantially as a share of GDP over the next five years but it still remains high over this period, all the more reason to identify ways in which it can be brought down further to more a manageable level”, he said.
Saudi Arabia may run out of financial assets needed to support spending within five years if the government maintains current policies, the worldwide Monetary Fund said, underscoring the need of measures to shore up public finances amid the drop in oil prices. Moreover, its own members seem to be engaged in a price war, with the national oil companies of various Opec countries periodically announcing cuts in prices (relative to some benchmark price).
The threat of political unrest is mounting in the “Fragile Five” of Algeria, Iraq, Libya, Nigeria and Venezuela, according to RBC Capital Markets LLC. The deliberate overproduction added to the weakening of overall demand and has slashed the prices by half during the past year.
Tehran says it can raise output by 500,000 BPD in the 1st week after sanctions are lifted.
Faltering United States supplies show the Saudi-led strategy is paying off, said Societe Generale’s Wittner.
Opec’s response to the emerging competition from non-Opec countries and the recent fall in oil prices has revealed that the organization is a divided house.
Consequently, spender countries have large cash needs and have a higher rate of discount and therefore would prefer to maximize their oil revenues and tend to operate near their full oil production capacity. The main drive in this proposal has been Venezuelan President Nicolas Maduro, who has been exerting great efforts to achieve stabilization of the price of oil at around US$88 per barrel, far from the current US$48.
