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Page added on November 25, 2014

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Saudis unlikely to cut oil production

Oil prices are bottoming, and Saudi Arabia is unlikely to heed Iran’s request for a cut in oil production when OPEC meets Thursday, analyst Stephen Schork told CNBC on Monday.

Iran’s semi-official news agency Mehr reported on Sunday that ministers from Iran will seek a cut from Saudi Arabia, joining a chorus of other members who have called for a reduction in output ahead of the meeting.

One factor that will influence Saudi Arabia’s decision is the outcome of Iran’s meeting with six world powers over its nuclear program. The participants missed a deadline to reach an accord on Monday and are expected to meet again next month.

“There’s no way in my mind that the Saudis are going to give an inch to the Iranians if the Iranians don’t give them something in return today with regard to the nuclear talks,” Schork said during an interview with “Squawk Box.”

Saudi Arabia has no incentive to play long ball, said Schork, pointing to the 9 percent return on its sovereign wealth fund that has produced $63 billion in the first nine months of the year. Its rainy day fund now totals $740 billion, giving it the ability to weather the low oil price market, said the analyst, editor of the Schork report.

Oil prices have plummeted 30 percent from their highs in June.

The issue amounts to OPEC “have-nots” such as Iran, Nigeria, and Venezuela demanding productive members such as Saudi Arabia and Kuwait to transfer their wealth, Schork said.

“Here we are, a bunch of capitalists, sitting around trying to bet on whether or not OPEC will behave like a good socialist,” Schork said.

Saudi Arabia and Kuwait have been more prudent in regards to their budgets, engineering them to balance out with oil at $80 to $90 a barrel.

He sees the bottom for oil at $75 to $80 a barrel, noting that low prices have increased Americans’ appetite for oil ahead of the holiday driving season, which will help work through overcapacity and supply.

“The only way I am wrong is if this is indeed 2008, 2009 and we are on the precipice of another global pull down. That to me is the only way we can break and really significantly drive prices lower at this point,” he said.

CNBC



12 Comments on "Saudis unlikely to cut oil production"

  1. westexas on Tue, 25th Nov 2014 7:52 am 

    Regarding Saudi Arabia, I suspect that they have been waiting for a downturn in global demand that would allow them to maintain their production and net exports (especially during their low domestic demand winter season), as a way to drive down oil prices, which would hurt the high cost tight/shale producers.

    But an important point to remember is that the Saudis have so far been unable, or unwilling (take your pick), to exceed their 2005 annual net export rate of 9.1 mbpd (total petroleum liquids + other liquids, EIA). This post-2005 decline in net exports is in marked contrast to the large increase that they showed from 2002 to 2005, as their net exports increased from 7.1 mbpd in 2002 to 9.1 mbpd in 2005, as annual Brent crude oil prices rose from $25 in 2002 to $55 in 2005. Based on EIA data, their 2013 net exports were 8.7 mbpd (total petroleum liquids + other liquids).

    As annual Brent crude oil prices rose from $55 in 2005 to the $110 range for 2010 to 2013 inclusive, Saudi net oil exports have been below their 2005 annual rate for eight straight years.

    A second, and almost totally ignored, point is that CNE (Cumulative Net Exports) depletion marches on. By definition, it’s not whether Saudi Arabia has depleted their remaining volume of post-2005 CNE. It’s a question of by how much. The following chart shows normalized values for Saudi production, net exports, ECI Ratio (ratio of production to consumption) and remaining estimated post-2005 CNE by year (with 2005 values = 100%). The estimate for post-2005 CNE is based on the rate of decline in the Saudi ECI Ratio (at an ECI Ratio of 1.0, net exports = zero). I estimate that in only seven years, through 2012, Saudi Arabia shipped roughly one-third of their post-2005 CNE.

    http://i1095.photobucket.com/albums/i475/westexas/Slide21_zps74c9ebac.jpg

  2. westexas on Tue, 25th Nov 2014 8:51 am 

    Slight correction: As annual Brent crude oil prices rose from $55 in 2005 to the $110 range for 2011 to 2013 inclusive, Saudi net oil exports have been below their 2005 annual rate for eight straight years.

  3. rockman on Tue, 25th Nov 2014 9:21 am 

    So let’s talk financial pain. According to the EIA all the tite oil producers (shales, sandstones and limestones) are producing 5.132 million bopd. And the KSA is exporting 9.84 million bopd. So for a $20/bbl drop in prices on a yearly basis US tite oil producers will see a reduction in revenue of $37.4 BILLION and the KSA a reduction of $71.8 BILLION. So the financial pain suffered by the KSA is more than twice that suffered by US tite oil producers collectively. OTOH one might argue that the KSA could handle that loss better.

    So let’s analyze that assumption. Some of the US tite oil producers depending heavily on those reservoirs to justify drilling. If price support diminishes they drill less and produce less oil. Some may go belly up. But let’s face the reality; very few US citizens will care if that were to happen. In fact, many would enjoy seeing it happen. The KSA, OTOH, won’t go belly up. But they’ll also loss some economic incentive to replace their depleting reserve base. Which, as westexas points out, they don’t appear to have been able to during the high price period. And the attitude of the citizens of the KSA? I hardly think they’ll be rejoicing in the streets due to a $72 BILLION/year income of their govt Sugar Daddy. It should be obvious to everyone by now that the Saudi govt has been keeping its citizens as docile as possible by supporting their needs: everyone in the KSA is dependent upon the govt revenue for every sip of water and bite of food. The KSA may have a cash reserve and a borrowing base. But depleting those resources is no less painful then depleting their oil reserves IMHO.

    And again the question: what does the KSA gain by giving up $70 BILLION/year or more? A reduction is tite oil development in the US? Sure…for as long as they are willing to give up all that revenue. If the price drop is the result of KSA actions so then would be a future price increase. And does anyone here think the US tite oil plays won’t kick off again? Westexas can add his thoughts on this subject also. I think he was in the game in the mid 80’s when $10/bbl oil decimated the oil patch. And I don’t use “decimate” lightly. So what happened when oil prices eventually increased: the oil patch (what was left of it) carried on as usual. And consider the shrinkage of the oil patch in 1998 (not that long ago) when the average inflation adjusted price of oil was $17.10/bbl. That was only about 20% of current oil prices. That’s the same oil patch which existed then and then began throwing countless $BILLIONS at the tite oil trends just 10 years later.

    The oil patch is not an organism that dies and never seen again. It is the epitome of the rising Phoenix. All it takes is an increase in oil/NG prices to be reborn as strong and as aggressive as it has even been. I seriously doubt that the KSA govt isn’t fully aware of this simple fact: the US tite oil plays, as well as the Canadian oil sands, will add to global production as long as there’s the price support and reserves left in the ground. What reduction in those plays brought about by the recent decrease in prices will be regained just as quickly (actually probably even quicker IMHO) once prices recover.

    So again a simple question: if the KSA caused the drop in oil prices what will they gain by doing so?

  4. JuanP on Tue, 25th Nov 2014 10:48 am 

    Based on recent precedent, I expect OPEC to agree on nothing at their next meeting. They haven’t agreed on anything for years. OPEC is completely dysfunctional. They may never agree on anything again!

  5. Northwest Resident on Tue, 25th Nov 2014 11:01 am 

    “They may never agree on anything again!”

    They can agree to disagree… 🙂

  6. GregT on Tue, 25th Nov 2014 11:52 am 

    “So again a simple question: if the KSA caused the drop in oil prices what will they gain by doing so?”

    USD global hegemony.

  7. rockman on Tue, 25th Nov 2014 12:23 pm 

    Greg – “USD global hegemony”.” More details, please. Not sure how the KSA benefits from losing $70+ BILLION of those USD every year.

  8. poaecdotcom on Tue, 25th Nov 2014 2:57 pm 

    Rock – my take:

    From a engineering standpoint you are correct about coming back to a rig when the price is right.

    From a financial standpoint you cannot put your debt payments on hold and wait for prices, you cannot put you lease on hold and wait. Its make SOME revenue or die.

    I think that KSA is

    (1) not prepared to loose market share as they did in the mid eighties

    (2) aware that there are many producers in more pain than they are at these prices.

    The unconventional producers will go BUST and there may be no one left to come back to the marginal plays even if/when prices go back to $100+ a barrel.

  9. shallowsand on Tue, 25th Nov 2014 3:28 pm 

    p. They will eventually come back at $100+ per bbl. However, true the more that go under the longer it will take to ramp back up in the high cost areas.

    I wonder if maybe this is going to be a short term drop. Shale driller equity values are not down as much as one would think if we are looking at a long period of low oil and Nat gas prices.

  10. Makati1 on Tue, 25th Nov 2014 7:19 pm 

    I think, from my reading, that the frakers are up to their top knot in debt. Any drop in the ability to service that debt will start an avalanche of defaults and bankruptcy. When the suckers are ruined, they will not be quick to come back for a second pain. End of fraking.

    There is more to the story than a sudden over supply of oil, or a sudden ‘helping hand’ to the failing Western economies. It may be to weed out the competition, but that is not going to work very well either unless they are willing to hold out a long time or drop the price much lower. I suspect 2015 is going to be a very very interesting year in many areas. Are you prepared?

  11. Speculawyer on Wed, 26th Nov 2014 2:27 am 

    I don’t understand this “lose market share” thought. Oil is a fungible commodity. It is not some brand like Apple. As long as you are willing to sell at the lowest price (including the transport costs), I think you can instantly take back any ‘lost market share’ at any time.

  12. poaecdotcom on Wed, 26th Nov 2014 12:27 pm 

    market share meaning % of total sold.

    If you cut production you reduce market share, fungible or not.

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