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The cartel’s Monthly Market Report, published Thursday, said its 12 members extracted an average of 31.38 million barrels of oil per day last month, down by 256,000 barrels per day in September because of export delays in Iraq and lower production in both Saudi Arabia and Kuwait.

As for next year, the report said low prices are prompting energy companies not affiliated with OPEC to pare back on capital expenses by nearly $200 billion. As a result, non-OPEC output in 2016 will fall by an average of around 130,000 barrels per day, “a gaping supply hole” compared with the average growth of 720,000 barrels per day in 2015.

The report on OPEC’s production decline comes less than a month before the cartel meets on Dec. 4 at its headquarters in Vienna. Some producers have been calling for the group to abandon its price war with rival producers, particularly in the United States, and bolster the price of oil, which has fallen from more than $110 per barrel in June 2014 to below $50 per barrel today.

Yet the report supports the opposing view: that the strategy, masterminded by Saudi Oil Minister Ali al-Naimi, is working precisely because OPEC is not only regaining market share it lost to rival producers, but also forcing those producers to extract less oil. Many of them rely on hydraulic fracturing, or fracking, to extract oil from shale, and can’t make a profit with the global price of oil so low.

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Saudi Arabia Cuts Spending, Slows Payments, Hits Spain Inc.

October 21, 2015

Saudi Arabia Cuts Spending, Slows Payments, Hits Spain Inc.

Ugly for Spain’s over-indebted, liquidity-challenged construction giants.

It’s almost a whole year since the House of Saud shocked the world by announcing its scheme to let market forces determine oil prices. It then did the unthinkable: it cranked up oil production. What followed was arguably the biggest price war of this fledgling century, as the price of oil fell by more than 50% in six months.

Suicide Economics

For struggling energy consumer nations, the collapse of the oil price has been a godsend; for producer nations, it has been a source of incalculable economic pain and misery. When the Saudis had their all-in moment, it was widely assumed that Russia, as well as a host of other unsavory oil-dependent “regimes” (such as Venezuela), would be first to buckle.

Eleven months on, Venezuela’s economic edifice is in tatters, Russia has lost billions of dollars in crude revenues, and the U.S. shale industry – broadly assumed to be the Saudis’ second target – is being kept alive only by increasingly difficult-to-come-by and expensive infusions of debt.

Yet despite all the balance sheet carnage, the Saudis have not won their oil price war. Not yet. Indeed, as prices continue to bite, it is the Saudi economy that is beginning to feel the pain, especially with an aggregate deficit for 2015 to 2017 forecast to exceed $300 billion.

The effects are now ricocheting around the economy, hitting businesses in Saudi Arabia and beyond. Here’s more from Bloomberg:

Saudi Arabia is delaying payments to government contractors as the slump in oil prices pushes the country into a deficit for the first time since 2009, according to three people with knowledge of the matter.

Companies working on infrastructure projects have been waiting for six months or more for payments as the government seeks to preserve cash, the people said, asking not to be identified because the information is private.

…click on the above link to read the rest of the article…

Oil Market Showdown: Can Russia Outlast The Saudis?

October 19, 2015

Oil Market Showdown: Can Russia Outlast The Saudis?

“Two men enter, one man leaves, two men enter, one man leaves, two men enter…”

Mad Max: Beyond Thunderdome

November 27, oil consuming countries will celebrate the first anniversary of the Saudi decision to let market forces determine prices. This decision set crude prices on a downward path. Subsequently, to defend market share, the Saudis increased production, which exacerbated market oversupply and further pressured prices.

While the sharp decline in crude prices has saved crude consuming nations hundreds of billions of dollars, the loss in revenues has caused crude exporting countries intense economic and financial pain. Their suffering has led some to call for a change in strategy to “balance” the market and boost prices. Venezuela, an OPEC member, has even proposed an emergency summit meeting.

In practice, the call for a change is a call for Saudi Arabia and Russia, the two dominant global crude exporters, which each daily export over seven-plus mmbbls (including condensates and NGLs) and which each see the other as the key to any “balancing” moves, to bear the brunt of any production cuts.

Both, it would seem, have incentive to do so, as each has lost over $100 billion in crude revenues in 2015—and Russia bears the extra burden of U.S. and EU Ukraine-related economic and financial sanctions. Yet, while both publicly profess willingness to discuss market conditions, neither has shown any real inclination to reduce output—in fact, both countries seem committed to keeping their feet pressed to their crude output pedals. In the course of 2015, both have raised output and exports over 2014 levels—Saudi Arabia by ~500 and 550~ mbbls/day respectively and Russia by ~100 and ~150. The Saudis have repeatedly cut pricing to undercut competitors to maintain market share in the critical U.S. and China markets, while the Russian Finance Ministry recently backed away from a tax proposal which Russian crude producers said would reduce their output.

…click on the above link to read the rest of the article…

Why Saudi Arabia’s Pursuit Of Market Share Is Self-Defeating

September 11, 2015

Why Saudi Arabia’s Pursuit Of Market Share Is Self-Defeating

The Saudis are on track to sacrifice ~$100 billion in crude export revenues in 2015, or 45 percent of 2014’s ~$219 billion in crude export revenues, in pursuit of market share, the measure of success Saudi Oil Minister Ali bin Ibrahim Al-Naimi announced at the November 27, 2014 OPEC meeting.

What do the Saudis plan as their encore in 2016? Will they continue pursuing market share over other goals (e.g., total revenue, economic diversification, OPEC conciliation), or will they alter course, and if so, is there a superior alternative?

Publicly, Saudi officials appear unwavering in support of market share. The crude oil futures markets and many pundits reflect this official line. Saudi economic fundamentals, IEA projections through 2020 for the oil market, and the currency markets—pressuring the Riyal-US$ peg—suggest the pursuit of market share is at best a chimera, at worst necrotizing fasciitis (flesh eating bacteria) for Saudi Arabia.

A Saudi Economic Reality Check

Depending on the data series used, the Saudi economy either is escaping unscathed, if not prospering, from the move to market share or is suffering from that move. The IMF Press Release reporting on an IMF team’s findings, published June 1, 2015, expressed the former:

“The decline in oil prices is resulting in substantially lower export and fiscal revenues, but the effect on the rest of the economy has so far been limited. Real GDP growth is projected by IMF staff at a healthy 3.5 percent this year, unchanged from 2014, with an increase in oil production and continued government spending expected to support the economy. Growth, however, is projected to slow to 2.7 percent in 2016 as government spending begins to adjust to the lower oil price environment. Over the medium-term, growth is expected to be around 3 percent. Inflation is likely to remain subdued.”

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OPEC Divorce And Self-Destruction Thanks To Saudi Oil Strategy?

August 30, 2015

OPEC Divorce And Self-Destruction Thanks To Saudi Oil Strategy?

“If you are the world’s leading energy economy, you produce energy, that’s what you do.”

“A government can stay irrational longer than it can stay solvent.”

“Even in the short term, you’re dead, if you commit suicide.”

The first quote modifies a GEICO commercial describing a free-range chicken (If you’re a free range chicken, you roam free, that’s what you do), the second, the famous John Maynard Keynes quote about markets (The market can stay irrational longer than you can stay solvent), the third, another famous Keynes quote (In the long run, we’re all dead).

Together, the three quotes provide a framework for analyzing Saudi options heading into the December 4 OPEC meeting in Vienna and its choices vis-à-vis the OPEC outsiders (all members but Saudi Arabia and its Gulf Arab allies, Kuwait, UAE, Qatar)—reconciliation, separation, or divorce.

If You’re a Free Range Oil Producer…

Despite low oil prices, Saudi Arabia is maintaining its investment in its oil industry. Saudi Aramco Chairman Khalid Al-Falih indicated in March that Saudi Aramcowould not cut investment. James Crandell, a Cowen & Co. oil analyst cited in this article, who has tracked oil companies’ budgets for many years, estimates that Aramco and its Kuwaiti and UAE counterparts will increase their investment in oil exploration and production in 2015 by 4.5 percent to $38.1 billion. (If proportional to output, the Saudi share would be $24.5 billion).

On it’s website, the Saudi Arabian General Investment Authority (SAGIA) identifies Saudi Arabia as the world’s premier energy economy, describes the outlook for the Saudi energy sector as never having been brighter or more secureand poised for unprecedented growth, diversification, and profitability, and asserts that the high oil revenue environment has spurred a boom in both oil and non-oil development projects.

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Saudis Expand Price War Downstream

July 26, 2015

Saudis Expand Price War Downstream

The undisputed king of oil and gas is making some moves that could change the face of the global refining sector.

In June 2015, Saudi Arabia pumped a record 10.564 million barrels a day, a record level. As if being the world’s biggest exporter of oil was not enough, the desert kingdom is now looking to conquer the refining sector as it has quickly become the fourth largest refiner in the world. “Saudis have moved into the product business in a big way,” said Fereidun Fesharaki of FGE Energy. With Saudi Arabia’s refined fuel contributing to the global supply glut, what will be its impact on the refining markets especially those in Asia?

How will Saudi Arabia Capture Market Share Downstream?

A refinery’s success is measured by its ‘gross refining margins’. The gross refining margin is nothing but the difference between the value of the refined products and price of the crude oil. In case of Saudi Arabia, the price of crude oil would be extremely low. “The crude is so cheap it’s pretty much free for them, the margins are going to be massive. It makes trade flows in products very different,” said Amrita Sen of Energy Aspects.

There is little doubt then as to why the Saudis are shifting their focus to domestic refining. Along with acquiring a controlling stake in Korea’s S- Oil, the desert kingdom is commissioning a new refinery in Jizan which would have a capacity of around 400,000 barrels per day when it begins operations in 2017. Jizan will come on top of Saudi Arabia’s two other 400,000 bpd- refineries at Yasref and Yanbu, and will turn the country into a major global player in the downstream sector, expanding its campaign for market share beyond just crude oil.

…click on the above link to read the rest of the article…

OPEC Still Holds All The Cards In Oil Price Game

July 9, 2015

OPEC Still Holds All The Cards In Oil Price Game

Traders were busy throwing in the towel on oil futures this week just as the first solid data and hope appeared that oil prices may be starting on the long road to recovery.

As oil prices approached $52 per barrel on Tuesday, July 7, the EIA released the July Short-term Energy Outlook (STEO) that showed an increase in global demand.

Figure 1. New York Mercantile Exchange crude oil futures, Continuous Contract #1 (CL1) (Front Month).

Source: Quandl

(Click image to enlarge)

Global liquids demand increased 1.26 mmbpd (million barrels per day) compared to May (Figure 2).

Figure 2. World Liquids Supply and Demand, July 2013-June, 2015.

Source: EIA and Labyrinth Consulting Services, Inc.
(Click image to enlarge)

This is the first data to support a potential recovery in oil prices. For months, great attention was focused on soft measures like rig count, crude oil inventories and vehicle miles traveled, all in the United States. These are potential indicators of future demand but hardly the kind of data that should have moved international oil prices from $47 in January to $64 in May.

The relative production surplus (production minus consumption) moved down to 1.9 mmbpd (Figure 3).

Figure 3. World liquids production surplus or deficit (total production minus consumption)

and Brent crude oil price in 2015 dollars. Source: EIA and Labyrinth Consulting Services, Inc.
(Click image to enlarge)

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Indiana Jones, Beyoncé, And Saudi Oil Production

July 7, 2015

Indiana Jones, Beyoncé, And Saudi Oil Production

Thirty-four years ago today, Indiana Jones was the number one movie at the box office with ‘Raiders of The Lost Ark.’ 1981 was also the year in which Beyoncé was born. These two reference points are just to highlight how long ago 1981 was (even if a swashbuckling Harrison Ford doesn’t seem that distant a memory). But while the world was a very different place back in 1981, one thing is the same now as it was then: the level of Saudi Arabian oil production.

According to OPEC data, Saudi oil production reached 10.3 million barrels per day in May, a level not seen since 1981. This data point is not all that surprising, given recent rumors and murmurs of a ‘price war‘ and the ‘targeting of market share‘ by OPEC’s leading producer. To put this May production number in context, it is some 435,000 bpd higher than the prior year; in March alone, Saudi increased production by 658,000 kbpd on the prior month, or ‘half a Bakken ‘as one article designated it. But it hasn’t just been Saudi who has ramped up production over the last year; this has been a theme across various members of OPEC. The cartel pegged production at 30.98mn bpd in May, while initial estimates for June pin this number at well over 31mn bpd, a three-year high.

Saudi’s export volumes are curious, however, in that they do not exude an obvious trait of stealing market share. In fact, they don’t even appear to be improving. Although Saudi has 12,000 miles of domestic pipelines, it does not operate any major functioning international pipelines. In other words, waterborne is the only way out for crude exports:

Domestic demand explains some of the anomaly away. Saudi Arabia is one of a handful of countries that directly burns crude oil for power generation, and estimates suggest it could increase production to as high as 11mn bpd this summer to meet domestic needs. Saudi could burn ~900,000 barrels of oil per day used this month to meet an increasing demand for air conditioning, just as it did in July of last year:

…click on the above link to read the rest of the article…

Delayed gratification for OPEC, more pain for investors

June 8, 2015

Delayed gratification for OPEC, more pain for investors

Delayed gratification is said to be a sign of maturity. By that standard OPEC at age 55 demonstrated its maturity this week as it left oil production quotas for its members unchanged. It did so in the face of oil prices that are about 40 percent lower than they were at this time last year, delaying once again a return to the $100-per-barrel prices seen during the past four years.

Why OPEC members chose to leave their oil output unchanged is no mystery. The explicit purpose for keeping oil prices depressed is to close down U.S. oil production from deep shale deposits–production that soared when oil hovered around $100 a barrel, but which is largely uneconomic at current prices. That production was starting to threaten OPEC’s market share.

If OPEC were to cut its oil production now and drive prices back up, it would only lead to increased drilling in the United States and loss of market share. In fact, even as spot oil prices sank below $45 per barrel in the United States earlier in the year, investors continued pumping money into U.S. oil drilling. According to The Wall Street Journal U.S. oil companies sold almost $17 billion in new shares in the first quarter of 2015, more than they sold in any quarter last year when prices were much higher.

Preliminary estimates by the U.S. Energy Information Administration show that oil production continues to grow in the United States despite low prices. (The final numbers won’t be in for months.) New investors in U.S. oil company shares must believe they are catching the bottom and will have a very profitable ride up from here. This demonstrates that OPEC’s work is not done and accounts in part for the decision to leave production quotas unchanged.

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Global Oil Shortage Before Year’s End? Surely Not…

June 8, 2015

Global Oil Shortage Before Year’s End? Surely Not…

Now that OPEC has left its production quota unchanged, the world will continue to see a glut in supplies, right?

Some analysts aren’t so sure. Sanford C. Bernstein predicts that by the end of the year global demand will outstrip supply by an estimated 1.5 million barrels per day.

That flies in the face of a lot of separate estimates. The IEA says that oil supplies are still in excess of what the world is consuming, by some 2 million barrels per day. Even with flat supplies coming from US shale, drillers are still pumping way more oil than the world is consuming. That leaves Bernstein as an outlier when it comes to guessing which way oil markets are heading.

But there is reason to believe that Bernstein is not off the mark. While market analysts are right to closely watch the trajectory of US production levels as well as what OPEC is up to, a lot less attention is being paid to the demand side of the equation. Part of OPEC’s strategy, we must remember, is to ensure the world stays hooked on oil for the long haul. The cartel’s strategy of keeping prices low dovetails with that – low prices reduce the urgency to transition away from crude oil.

And their strategy is bearing fruit – demand is growing quickly. The IEA said in its May report that “global demand growth gained momentum in recent months.” That is certainly true in the US, where motorists are hitting the roads at levels not seen since before the financial crisis. Seduced by lower prices, gasoline consumption is at its highest level since 2007, after years of stagnation. Low gas prices are also giving a boost to SUV sales as drivers cast off their energy efficient ways at the first sign of weak prices.

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Saudi Arabia, Russia in No Mood to Cave to US Fracking Boom

May 13, 2015

Saudi Arabia, Russia in No Mood to Cave to US Fracking Boom

The recently vaunted decline in US crude oil production, supported by granular estimates, has been used in rationalizing the newly sizzling rally in oil prices. Analysts are digging through local details to come up with clues where this might be going. Money is re-pouring into the sector. And folks are already espousing the next stage, that the glut is over and that a shortage will set in soon, or something.

Alas, the decline in US oil production is, let’s say, relative. The EIA estimated that in the week ended May 1, producers pumped 9.369 million barrels per day. So that’s down from the crazy peak set during week ended March 20 of 9.422 MMbpd. Halleluiah, production is back where it was on March 6! And it’s up 12.2% from a year ago!

Note the circled areas in the chart: these weekly estimates are inherently volatile. In 2014, there were several periods of much sharper declines, even before the oil bust began in early July. Compared to those declines, the recent levelling off – and that’s all it is at this point – seems mild.

With US crude oil production on a weekly basis just a smidgen off its crazy peak in March, the other two of the world’s top three producers aren’t cutting back either.

Russia pumped 10.71 MMbpd in April, same as in March. Both months beat last year’s post-Soviet record average of 10.58 MMbpd.

And Saudi Arabia produced a record 10.31 MMbpd in April, after having already set a record in March of 10.29 MMbpd, “a Gulf industry source” told Reuters today. Production in both months beat the prior record going back to the early 1980s of 10.2 MMbpd set in August 2013.

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Saudi Arabia Continues To Turn Screws On U.S. Shale

May 13, 2015

Saudi Arabia Continues To Turn Screws On U.S. Shale

Saudi Arabia continues to ratchet up production, taking market share away from U.S. shale producers.

According to OPEC’s latest monthly oil report, Saudi Arabia boosted its oil output to 10.31 million barrels per day in April, a slight increase over the previous month’s total of 10.29 million barrels. That was enough for the de facto OPEC leader to claim its highest oil production level in more than three decades.

Saudi Arabia has increased production by 700,000 barrels per day since the fourth quarter of 2014 in an effort maintain market share. The resulting crash in oil prices is forcing some production out of the market, and Saudi Arabia intends for the brunt of that to be borne by others.

There is a lag between movements in the oil price and corresponding changes in production. OPEC says there was a 23-week time lag between the fall in rig counts and the resulting dip in oil production in the United States. But the effects of the oil price crash are now being felt. New data from the EIA says that U.S. oil production is declining. Having already predicted a 57,000 barrel-per-day decline for May, the agency now says that another 86,000 barrels per day in output will vanish in June.

In other words, as Saudi Arabia ramps up, U.S. shale is being forced to cut back. This story has been told many times over the past few months, but the data is finally confirming the success of Saudi Arabia’s strategy, albeit a minor one thus far.

…click on the above link to read the rest of the article…

Saudi Arabia’s Oil-Price War Is With Stupid Money

April 21, 2015

Saudi Arabia’s Oil-Price War Is With Stupid Money

Saudi Arabia is not trying to crush U.S. shale plays. Its oil-price war is with the investment banks and the stupid money they directed to fund the plays. It is also with the zero-interest rate economic conditions that made this possible.

Saudi Arabia intends to keep oil prices low for as long as possible. Its oil production increased to 10.3 million barrels per day in March 2015. That is 700,000 barrels per day more than in December 2014 and the highest level since the Joint Organizations Data Initiative began compiling production data in 2002 (Figure 1 below). And Saudi Arabia’s rig count has never been higher.

Figure 1. Saudi Arabian crude oil production and Brent crude oil price in 2015 U.S. dollars. Source: U.S. Bureau of Labor Statistics, EIA and Labyrinth Consulting Services, Inc.

Market share is an important part of the motive but Saudi Minister of Petroleum and Mineral Resources Ali al-Naimi recently emphasized that “The challenge is to restore the supply-demand balance and reach price stability.” Saudi Arabia’s need for market share and long-term demand is best met with a growing global economy and lower oil prices.

That means ending the over-production from tight oil and other expensive plays (oil sands and ultra-deep water) and reviving global demand by keeping oil prices low for some extended period of time. Demand has been weak since the run-up in debt and oil prices that culminated in the Financial Collapse of 2008 (Figure 2 below).

…click on the above link to read the rest of the article…

This Week In Energy: The War For Market Share Is Only Just Beginning

February 1, 2015

This Week In Energy: The War For Market Share Is Only Just Beginning

This week saw yet more bad news for the oil sector, as the EIA’s latest figures released on Wednesday showed U.S. Inventories at levels not seen since 1982, when the agency first started collecting such data. To put it another way, the last time an ounce of gold bought you 29 barrels of oil was 1988. This resulted in a dip midweek before modest gains began to emerge yesterday off the back ofnews coming from Iraq of Islamic State militants launching an offensive on Kurdish forces near the oil-rich city of Kirkuk. Iraqi production rose by 200,000 barrels a day for a total monthly output of 3.9 million, according to a Bloomberg survey of industry experts, while total OPEC production rose by 483,000 barrels a day to 30.905 million barrels a day. Building on yesterday’s modest gains, we are seeing some highly promising signs after this morning’s trading, with oil prices currently up by over 7 percent at $47.97, but even so, it appears that the supply glut will continue as the battle for market share continues.

This war for market share may intensify further as yet more pressure mounts on the Obama administration to lift the U.S. crude export ban which has lasted for over 40 years. There are several fronts to the export battle, both external and internal. Latest poll data from Reuters suggests more Americans are now in favor of oil exports than ever before (though only by a small margin). In terms of public opinion, the overriding factor is concern over gasoline prices, which have halved in recent months thanks to the drop in crude oil prices. Former National Security Advisor to President Obama, Tom Donilon, says a complete lifting of the ban would be the “correct policy decision,” citing economic benefits, securing America’s energy future, foreign and energy policy goals as the benefits. Elsewhere experts maintain that easing the ban would have a positive impact for consumers in terms of gasoline prices as more crude oil on the international markets would maintain lower prices. However, not everyone would rejoice at the ban being lifted, first and foremost the U.S. refining industry, that has benefitted greatly from cheaper domestic crude oil supplies. Four refinery CEOs have already sent letters to the Senate Energy and Natural Resources Committee Chairwoman Lisa Murkowski to highlight the thousands of long-term, well-paid jobs that have been created by the U.S. shale boom replacing imports of foreign oil.

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