Is the Floor In Sight? Production Cuts May Be The Only Viable Alternative For Saudi Arabia and OPEC

As OPEC’s designs to push out US producers seem to have backfired, and the economy of Saudi Arabia reaches historic lows, we are entering a new stage in oil pricing trends.

Is the Floor In Sight?  Production Cuts May Be The Only Viable Alternative For Saudi Arabia and OPEC
Two years ago, OPEC’s announcement that it would not cut production was followed by an immediate 10% plunge in oil prices

Back in September, the market rallied when OPEC started discussing a plan to start making production cuts. As that becomes uncertain, oil prices are suffering once again. OPEC will meet in Vienna on November 30th to try to finalize an agreement it has been working on since September.

With stockpiles of oil hitting record highs in the US, and global inventory receiving one boost after another, skepticism about OPEC’s agreement is currently driving prices down.

If OPEC members don’t agree on the much-discussed production cuts, the price of crude could go as low as $40 a barrel before the year is out – maybe lower. If they do agree, we might see prices of $50 and upwards.

Back in September, when it was first announced that OPEC countries had agreed to reduce output for the first time since 2008, the organization itself was probably surprised by its renewed power to influence the market, as the news was followed by a 5% surge in prices. It became clear at that moment that prices would certainly plunge without a deal.

For years, OPEC has been trying to produce more, drive prices down, and increase market share to stay on top. But with historically affluent OPEC countries on the brink of recession, they can no longer sustain that strategy. By driving prices down, they meant to discourage high cost producers like US shale producers, but with its more diversified economy and insatiable pursuit of technological innovation, America has proved a difficult enemy to have.

Now, Deputy Crown Prince Mohammed bin Salman is trying to fight an ailing economy by diversifying Saudi Arabia’s exports. But the urgency of the country’s situation is unlikely to be appeased by such long-term strategies, especially in the light of the high military expenses associated with the war with Yemen.

The Saudi government has rapidly passed on its losses to the kingdom’s people, raising taxes, cutting welfare payments and reducing subsidies for fuel, water, and electricity. The result has been social discontent amid a wave of rising unemployment.

According to a recent report by Blackpool Capital Management, Saudi Arabia’s currency reserves fell  by over $54 billion between January and August, and the stock market is currently reaching multi-year lows. “The country retains an investment grade status and has followed its peers (International bond issuance in 2016 – Qatar $9B, Abu Dhabi $5B, Oman $4.5B) by issuing $17.5B of debt on the international bond market.  They have also announced plans to IPO Saudi Aramco, the world’s largest oil company during the first quarter of 2018.  They hope to raise $100B by listing 5% of the company, valuing Aramco at $2 trillion.  They are certainly incentivized on many fronts to support oil prices in the coming year,” the report concludes.

In view of this scenario, it is highly unlikely that OPEC countries, especially Saudi Arabia, can avoid an economic catastrophe and possible civil unrest if oil prices keep plummeting. For this reason, I believe we have finally reached the floor for oil prices. The US will not stop producing and OPEC will not thrive, even if prices keep falling, and OPEC can no longer afford to maintain the strategy it has been using since the shale revolution changed the geopolitical map of oil production forever.


Image by Day Donaldson IMAGE LOCATION: www.flickr.com Attribution included in caption

Share

Share by email

Attorney Jimmy Vallee is an energy Mergers & Acquisitions lawyer, oil and gas industry commentator, and frequent resource for media outlets including USA Today, U.S. News & World Report, Oil & Gas Monitor and others. His new book, Giant Shifts: Energy Trends Reshaping America’s Future, released in May, 2017 hit #1 in two Amazon categories the week of its launch. Connect with Jimmy at [hidden email]  “Noted Energy Futurist” – Mensa AG 2016


You might also like:

Visit Jimmy's Law Firm: Paul Hastings
media