Here’s why the U.S. shale upstarts just might win a confrontation with Saudi Arabia as oil sinks: While the Arab nation is as flush with cash as ever, the finances of some fellow OPEC members are deteriorating quickly.
Venezuela, for example, has burned through billions of dollars, leaving its foreign reserves near a decade-low, to stave off default. In Nigeria, officials are struggling to stem a selloff in the currency that has left it at a record low.
Those financial strains have Venezuela calling for action to prevent further declines in oil prices while a Libyan representative said the 12-member Organization of Petroleum Exporting Countries should cut its output target. When executives at American shale companies talk about having more staying power in a price war than some of the Saudis’ partners, these countries, along with places like Ecuador and Iran, are the key weak links in question.
“Saudi Arabia and the oil-rich Gulf monarchies can afford to take the long-term remedy as they have enough cash reserves,” Theodore Karasik, senior adviser at Risk Insurance Management, said by phone from Dubai yesterday. “Libya and Venezuela, on the other hand, need a quick intervention by OPEC.”
Brent crude, the international benchmark, plunged 29 percent since June to $82.54 a barrel today as the shale boom lifted U.S. production to the highest in at least 31 years and global demand slowed. At this price only Kuwait, Qatar and the United Arab Emirates will earn enough to balance their budgets, while Iran, Iraq and Algeria need at least $100, the International Monetary Fund said in a November 2013 report.
Shale Producers
Shale oil drillers will be hurt by the fall in crude prices before members of OPEC because their costs are higher, said the group’s secretary-general, Abdalla El-Badri. As much as 50 percent of tight oil output will be “out of the market” at current prices, he said at a conference in London Oct. 29.
Executives at several large U.S. shale producers, including Chesapeake Energy Corp. (CHK) and EOG Resources Inc. (EOG), vowed to maintain, and even raise, production as they reported earnings this week. They say their success in bringing down costs means they make money even if prices slump further.
The average price of OPEC’s main export grades fell below $80 a barrel for the first time in four years on Nov. 4, the group said by e-mail. The group will decide on future production quotas when it meets in Vienna on Nov. 27.
OPEC members’ fiscal break-even levels, the price at which their budgets are balanced, are more important for determining members’ production policies than the cost at which they can pump oil, according to analysts at Commerzbank AG and IHS Inc.
Venezuelan Discomfort
“OPEC members are countries, not companies, so they don’t look at the profitability of wells, they look at their revenue for a fiscal or current account standpoint,” Jamie Webster, a Washington, DC-based analyst at IHS, said by e-mail. “Crude production costs are a secondary matter.”
Venezuela, which gets 96 percent of its dollar earnings from oil, loses $700 million a year for each $1-a-barrel price drop, according to state-run oil company Petroleos de Venezuela SA. The country is almost certain to default on its foreign-currency bonds, Harvard University economists Carmen Reinhart and Kenneth Rogoff said last month.
The government’s benchmark bonds due 2027 were trading yesterday at 62 cents on the dollar, down from as high as 89 cents back in July.
Venezuela’s Information Ministry didn’t respond to an e-mailed request for comment on Nov. 4. President Nicolas Maduro has repeatedly said Venezuela won’t default.
“We are taking actions internationally to defend the oil market and price on behalf of all Venezuelans,” Maduro said on state television Oct. 31. Foreign Minister Rafael Ramirez was in Ecuador last week to prepare a joint proposal for OPEC action, Maduro said.
Ecuador’s Deficit
Venezuelan officials are already uncomfortable and “they really run into trouble” if prices fall closer to $80 a barrel for a sustained period, Risa Grais-Targow, a Eurasia Group analyst, said Oct. 17 by phone from Washington. The country needs $162 a barrel to balance its budget, according to Deutsche Bank AG.
Venezuela is not in any “immediate” risk of default, Sebastian Briozzo, director of sovereign ratings at Standard & Poor’s, said in an interview on Oct. 14 in New York. S&P lowered the country’s credit rating to CCC+ on Sept. 16.
The fall in oil prices is “very serious” for Ecuador’s economy, said David Rees, an emerging-market economist at Capital Economics in London. Finance Ministry forecasts show prices of $80 to $84 a barrel would leave the government with a “huge” deficit of 5 to 6 percent of gross domestic product in 2015, Rees said.
Ecuador is working with Venezuela and other OPEC members to “improve” oil prices, Finance Minister Fausto Herrera told reporters in Quito on Nov. 4.
Nigerian Reserves
Nigeria’s foreign-exchange reserves dropped for 16 consecutive days, sinking to $38.3 billion on Nov. 3, a three-month low, according to the central bank. The country needs a Brent price of $126 to balance its budget, Deutsche Bank said.
Iraq, the second-largest producer in OPEC, was still recovering from three decades of war and sanctions when the Islamic State seized a swath of its northern territory in June. While 3.3 million barrels of daily oil production in the country’s south hasn’t been affected, the violence has shut down a 350,000-barrel export pipeline in the north and halted the country’s largest refinery.
The government scrapped the 2014 budget because of political disputes and concerns over a deficit stemming from falling oil prices, Masoud Haidar Rostam, a lawmaker from the Iraqi parliament’s financial committee, said by phone on Nov. 3. The 2015 budget “will most probably be based on an average oil price of $65 to $70 per barrel to avoid a deficit,” he said.
Libya Strife
Libya remains torn between Islamists that took control of the capital Tripoli this summer and an internationally recognized cabinet that fled to the country’s east. While oil production almost quadrupled since April to 850,000 barrels a day last month, output this year was still less than a third of the level before the 2011 overthrow of Muammar Qaddafi.
The country’s OPEC governor, Samir Kamal, said by e-mail on Oct. 25 that the group should cut its daily output target to 29.5 million barrels from 30 million to support prices.
Iran’s revenue from crude sales, already curbed by U.S. and European sanctions, dropped 30 percent because of the recent price decline, President Hassan Rouhani said Oct. 29. Iran’s $400 billion economy shrank more than 7 percent over the past two years, according to the IMF. The country pumped 2.77 million barrels a day in October, down 23 percent since the start of 2012, according to data compiled by Bloomberg.
$745 Billion
Saudi Arabia, the world’s largest oil exporter, has $745 billion of reserve assets, data from the country’s monetary agency show. In a sign it’s prepared to accept lower prices in favor of defending market share, it cut differentials for supplies to U.S. customers this week, a month after discounting shipments to Asia by the most in almost six years.
The Saudis can cover spending plans with Brent at $84 a barrel, according to the IMF. The kingdom could “weather even an extended downturn” below its break-even price, U.S. ambassador to the kingdom, Joseph Westphal, told the National Council on U.S.-Arab Relations conference in Washington on Oct. 29. The country has the largest foreign reserves after China and Japan, according to data compiled by Bloomberg.
Kuwaiti Price
To win the showdown with U.S. shale, the Saudis are trying to bring OPEC’s weaker members in line, according to Seth Kleinman, head of European energy research at Citigroup Inc. in London. Saudi Oil Minister Ali Al-Naimi is attending a climate conference in Venezuela this week where he met with the country’s OPEC representative, Rafael Ramirez. He’s due to attend a gas forum in Acapulco, Mexico, on Nov. 11-12.
The trip is reminiscent of the 1990s, when Saudi Arabia’s competition with Venezuela and Mexico for shipments to the U.S. Gulf Coast drove down prices, according to Mike Wittner, head of oil market research at Societe Generale SA in New York.
Kuwait’s plans won’t be affected as long as the price is above $75, Oil Minister Ali Al-Omair said Oct. 27, according to the state-run KUNA news agency. There’s “no room” for OPEC to reduce exports to achieve higher prices, he said Oct. 13. Qatar needn’t worry because it’s still the lowest-cost producer in the world, Qatar Petroleum International Chief Executive Officer Nasser al-Jaidah told reporters in Doha on Nov. 3.
“OPEC is lining up between the haves and the have-nots,” Dominick Chirichella, senior partner at the Energy Management Institute in New York, said by phone Nov. 4. “Iran, Venezuela, Nigeria and Ecuador are really going to be struggling very mightily at these prices.”
That’s who the shale producers are counting on.
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