Stewart Dalby: Everyone's a loser in Saudi oil war

The OPEC December 4 meeting was a rancorous affair when not only were no production cuts made, but the output ceiling of 30mln barrels a day was officially lifted.

The price of a barrel of crude has dipped to its lowest level in seven years.

As the oil price slumps to its lowest point in seven years, the price war that Saudi Arabia launched against US shale producers to protect its global market share of oil sales by inflating supply, looks like turning just about everybody into a loser.

This includes not only Saudi Arabia itself but also oil companies’ large and small, stock market investors, fellow members of the Organisation of Petroleum Exporting Countries (OPEC), and non OPEC countries such as Russia; which with an output similar to Saudi Arabia vies with Saudi Arabia to be the world’s largest oil exporter

Saudi Arabia is the dominant member of the 12 country cartel.   OPEC’s target output has long been set at 30mln barrels a day but that has constantly been exceeded with the Saudis exporting 1.5mln a day more than they should have been.

In a sense, the Saudi strategy has worked, in that the US which also produces around 10mln barrels a day (mostly for domestic consumption) is likely to have fallen by 600,000 barrels a day by early 2016. US Shale fracking companies have been cutting back or going bust. It seems that banks in the US, to which shale oil producers are heavily leveraged, are also feeling the strain.

Recently a trio of US bank regulators reported that aggregate loans in danger of default had risen to US$34bn - five times higher than a year earlier.

Yet in another sense it is a pyrrhic victory. The Saudis refusal to cut output and perform the demand/supply balancing act OPEC with 40% of global supply has traditionally performed, came at a time of oversupply anyway.

Iraq and other OPEC members have been pushing output for all they were worth and Russia has been selling every barrel it could produce, while oil prices were high.

In the background was the knowledge that Iran would be adding somewhere between 300,000 barrels a day and 600,000 bopd to the glut once sanctions are finally lifted. The International Energy Agency (IEA) based in Paris has estimated that global stocks amount to 3bn barrels.

In the circumstances it was inevitable that the price would fall from their high of US$115 a barrel in late 2014. The Saudis have just been pouring oil on to the fire (excuse the pun)

Saudi Arabia did make overtures to Russia along the lines of ‘we will make production cuts if you will’.   But the Russians were not keen on the idea.

When it became known in the week before the OPEC meeting was due on December 4 that the Saudis had started to sell oil in Russia dominated markets such as Sweden and the Baltic countries for the first time in 20 years all bets were off.

The OPEC December 4 meeting was a rancorous affair when not only were no production cuts made, but the output ceiling of 30mln barrels a day was officially lifted.  

Since the meeting the oil price has tumbled from US$43 a barrel to US$35 at one point this week, the lowest level since 2008. The FTSE 100 index sunk to a three-year low because of fall plummeting oil and commodity prices.

Oil stocks fell. The majors like Shell and BP have seen their shares prices decline by between 20 and 40% in the past year, while small caps have seen losses of 80%.

Also, since the OPEC meeting Maxim Oreshkin, the Russian finance minister, told the Daily Telegraph  the country is drawing up plans  based on a price band fluctuating between US$40 and US$60 a  barrel as far out as 2022.

This is bad news for OPEC. But it also means pain for Russia since it will mean a devaluation of the Rouble. Devaluation makes exports cheaper and oil is far and away Russia’s largest export.

Some of OPEC’s weakest members like Angola and Venezuela have had to endure severe currency depreciations and others have seen widening budget deficits.

Saudi Arabia itself has been suffering. Reserves were US$738mln a year ago and fell to a three year low of US$647mln in September this year. The International Monetary Fund (IMF) has estimated the Saudis budget deficit will reach 20% of GDP this year or roughly US$140mln. Major infrastructure projects have been postponed.

What has all this disarray been for? Simply, the Saudis have lost control of the market. The only beneficiaries are the consumers. In the UK petrol prices have dipped close to £1 a litre, the lowest they have been for 11 years.  

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