OPEC hard stance: the morning after

The hard stance of OPEC not to curb crude oil output in the face of plummeting prices comes off as a grand experiment morning after the decision.

At its meeting on November 27, 2014 in Vienna, OPEC said it will not cut the official production target of 30 million barrels a day, about a third of which comes from Saudi Arabia, and that is putting more negative pressure on the price of crude which has dropped below $70. Oil traders in London sent WTI futures on the ICE down below $68 a barrel that same day. Brent crude dipped to just over $71 a barrel. These are four-and-a-half year lows.

2015 budget nightmare

A production cut by the 12-member Organization of Petroleum Exporting Countries would have been the quickest way to tighten the world’s oil supplies and boost prices. In the US, supply is expected either to remain flat or rise by almost 1 MMbopd next year, according to International Energy Agency. That’s because only about 4 percent of shale production needs $80 or more to be profitable. Most drilling in the Bakken formation, one of the main drivers of shale oil output, returns cash at or below $42/bbl, the IEA estimates.

Plunging oil markets already have begun to pressure governments that rely on higher prices to finance their budgets, fuel subsidies to citizens and expand drilling. Nigeria increased interest rates for the first time in three years on November 26 and devalued its currency. The government is planning to cut spending by 6 percent in 2015 and have lowered the oil benchmark in a process which appears not to be the last time a downward adjustment of the benchmark for the 2015 budget would occur. Venezuela’s oil income has fallen by 35 percent, President Nicolas Maduro said.

Saudi Arabia has enough cash stockpiled to finance its budget for more than 20 years according to an analysis from CIBC World Markets. Russia has about six years of financial reserves at that price, but Iraq, Nigeria and Iran all have less than two years. Venezuela has less than six months, based on the analysis.

UAE backs OPEC move to halt swing-producer

The United Arab Emirates backs OPEC’s move to not play a so-called swing-producer role as oil prices decline.

Suhail Al-Mazrouei, Energy Minister said; “We don’t support to be a swing producer whenever prices fall. The market will dictate the right stable price and we are not targeting or setting a specific price.”

Al-Mazrouei said he supports the OPEC decision to keep production unchanged because it will benefit customers, the oil market and the global economy.

“We need to allow enough time for market stability, we will not panic,” he said.

A fracking boom has driven US oil output to the highest in three decades, contributing to a global surplus estimated at 2 MMbpd.

Demand for the group’s crude will fall every year until 2017 as US supply expands, eroding its share of the global market to the lowest in more than a quarter century, according to the group’s own estimates.

OPEC decision spells trouble for Russia

The decision by the Organization of Petroleum Exporting Countries (OPEC) to keep production at its current limits in the face of slumping oil prices means trouble for the Russian economy. Russia ruble fell further after the OPEC decision was announced. Russian stocks also dropped on the news.

Russia, the world’s biggest energy exporter and a weaker ruble in Russia on the back of sanctions imposed on the country after its incursions into Ukraine has not helped rampant inflation miring the domestic economy. The economy ministry believes inflation will hit 9 percent before the year is out.

Some analysts believe a plunge in the price of oil to less than $70 a barrel may be part of a US strategy to hurt Russia as it puts pressure on its fiscal budgets.

Investors in energy shares rush for exit

A fresh slide in the price of crude wiped tens of billions of dollars off oil companies’ market value and signalled an end to the sector’s safe-haven status, as fears mounted over future profits and dividend payouts as investors reassessed whether the sector could keep gushing cash after OPEC’s decision not to cut oil production to fight a supply glut.

Oil prices have been sliding for months, but the pain has mostly been felt by oil-services suppliers rather than majors. Investors maintained some faith in them based on their record of paying reliable dividends.

$33 billion in market capitalisation has wiped off the sector in Europe after the OPEC decision. Norway’s Statoil fell 8.2 percent, BP fell 3.7 percent and Shell 3.3 percent. Overall, the sell-off since Thursday amounts to around $67 billion in lost market value. That compares with a total dividend payout from the sector of $41.6 billion in the second quarter of 2014, according to data from Henderson Global Investors.

Frank Uzuegbunam