August 25, 2015 3287 VIEWS
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Tuesday, August 25, 2015 07:02 AM / By Dalan McEndree for Oilprice.com

OPEC next gathers December 4 in Vienna, just over a year since Saudi Oil Minister Ali Al-Naimi announced at the previous OPEC winter meeting the Saudi decision to let the oil market determine oil prices rather than to continue Saudi Arabia's role of guarantor of $100+/bbl oil.

Despite the intense financial and economic pain this decision has inflicted on Saudi Arabia, its fellow OPEC members, and other oil producers, the Saudis have given no indication they plan to alter course. In fact, Saudis have downplayed the impact of lower prices on their country, asserting that the kingdom has the financial wherewithal to withstand lower oil prices.

Presumably swayed by Saudi equanimity, financial markets do not see the Saudis abandoning their current policy before, during, or after the upcoming OPEC meeting. CME Brent oil futures project continuity: as of August 18, 2015, CME Brent futures projected the price remaining below $60/bbl until June 2017. A CNBC poll of oil traders, analysts, and major fund investors, aired on CNBC August 17, showed 95 percent believing the Saudis will not alter course.

Are the futures market, CNBC's oil traders, analysts, and major fund investors, and others, being lulled into an unjustified consensus?

The damage the Saudi decision has inflicted on Saudi Arabia itself provides reasons for the Saudis to change course.

Saudi Policy: OPEC-centric or Self-Serving?

Stresses within OPEC should add to the pressure on the Saudis to rethink their strategy. The Saudis sold their change to their fellow OPEC members as being in OPEC's general interest. They asserted that the their traditional method of stabilizing the oil market, production cuts, would not work since non-OPEC producers would increase output; second, that "market" forces would reduce investment and therefore increase prices in the medium and longer term and ultimately benefit all OPEC members; and third, that any Saudi increase in output was aimed at defending its market share, not reducing theirs.

As the first anniversary of the Saudi decision approaches, it would be reasonable for OPEC outsiders–OPEC members, other than the Saudis and their Gulf Arab allies, Kuwait, UAE, and Qatar—to interpret Saudi policy shift as designed to serve Saudi interests and those of its Gulf Arab allies rather than their interests and those of OPEC in general.

"Market" forces include many components. A key component—perhaps the key component—is a country's capability, at a minimum, to maintain output, and better yet, to increase output. Financial wherewithal is the foundation of this component. Saudi and Gulf Arab OPEC members' foreign currency reserves and sovereign wealth funds (SWF) comprise approximately 78 percent of total OPEC member holdings, $2.73 trillion of $3.05 trillion.

As the following table shows, their advantage is particularly large on a per capita basis. Of the non-Saudi, non-Gulf Arab ally OPEC members, only Libyan per capita resources exceed the average. (The UAE includes data for three SWF funds only: Abu Dhabi Investment Authority ($773 billion), Abu Dhabi Investment Council ($110 billion), and Investment Corporation of Dubai ($183 billion)).



Given the other budgetary demands on their oil revenues, $50/bbl or $60/bbl oil leaves these OPEC outsiders with little to invest in maintaining oil output, much less expanding output. Budgetary pressures and limited financial resources, for example, have forced the Iraqi government to request its foreign partners, BP in the Rumaila field and Exxon in the West Gurna-1 field, to reduce spending to cut 2015 investment by $500 million ($1.1 billion vs. $1.6 billion) and $1 billion ($2.5 billion to $3.5) respectively.

While all OPEC members, including Saudi Arabia, have suffered from the Saudi decision, they have not shared the pain equally. Saudi Arabia and its Gulf Arab allies, except Qatar, have increased output, while the output of other OPEC members, other than Iraq and Angola, has either flat-lined or decreased, compared to 2014:



Given Saudi determination to defend its export markets, it is interesting that the percentage gain in their crude exports exceeded the percentage gain in crude output in 1H 2015, by 2.7 percentage points. For Iran, the only other OPEC country for which the IEA provides domestic demand data, the increase in exports, 0.7 percent, matched the increased domestic output.


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