Saudi Arabia Cuts Oil Prices, Could Spark Price War

Discussion in 'Economy & Infrastructure' started by amoy, Oct 18, 2014.

  1. amoy

    amoy Senior Member Senior Member

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    Saudi Arabia Cuts Oil Prices, Could Spark Price War

    In a surprise move this week, Saudi Arabia cut the price of its flagship Arab light oil, which it sells mostly to its Asian customers, by one dollar a barrel. It also cut prices to its customers in the United States and Europe by $.40 a barrel. This brings Saudi Arabia’s prices below those offered by OPEC member Qatar and non-OPEC member Oman. Oil futures traders are holding their breaths, waiting for Qatar and Oman to cut their prices in response, setting off a full-scale oil price war.

    The simple economics of supply and demand have already driven the price of oil down by almost 20 percent since June, and a number of traders and other observers are suggesting those prices have much further to drop. Analyst John Kilduff of Again Capital said, “I think we’re going to see the low $80s fairly quickly from here,” while Fadel Gheit, a senior energy analyst at Oppenheimer, explained, “It’s both supply and demand. It’s basically the perfect storm that brought all prices down. You have plenty of supply, which you never thought possible, and all of a sudden, demand is shrinking: China is slowing down [and] Europe never recovered.”

    Gheit expects retaliation from other members of OPEC because that cartel, he says, “is held together by scotch tape. They hate each other.” He says the members of the cartel are mostly interested in maintaining market share and because of that he sees crude oil prices falling in the longer term into the $70s.

    The Energy Information Administration (EIA) predicts that crude oil production in the United States will rise next year to the highest level in nearly 50 years, while Goldman Sachs noted earlier this week that Russia’s crude oil output has risen to nearly a post-Soviet era record. Bloomberg estimates that crude oil production from Kurdistan over the next 15 months will likely increase by more than China’s increase in demand for oil over that period.

    In the short run, that is having a positive impact on prices at the pump in the United States, which fell to an average of just $3.32 a gallon last week, the lowest price since February. More than half of the states have at least one gas station selling gas at less than three dollars a gallon.

    If oil prices drop too far, however, production will be stymied. As Stephen Leeb, a writer at Forbes, put it, “It takes energy to get energy.” In the early 1950s, it took the energy from 20 barrels of oil to harvest 100 barrels. Today, in conventional oil fields, it takes about one barrel to produce nine.

    But the cost to discover, develop, and lift nonconventional oil — shale oil fracking — takes about one barrel to produce four barrels. According to State University of New York Professor Charles Hall, the energy from one barrel of oil must recover a minimum of five barrels to allow a modern industrial society such as America’s to grow and thrive and prosper. In other words, if the price of crude does drop to $70 barrel and stay there for an extended period, energy exploration companies will have little incentive to discover and develop additional resources.

    At present, American drivers are enjoying the savings at the gas pump and those savings are being spent elsewhere, helping the economy to continue to recover, albeit slowly, from the Great Recession. In the energy business, nothing happens in a straight line, and any dampening to America’s remarkable record-setting production due to low prices remains several years in the future.

    [​IMG]

    A graduate of Cornell University and a former investment advisor, Bob is a regular contributor to The New American magazine and blogs frequently at Light from the Right - Conservative Commentary on Critical, Constitutional Issues, primarily on economics and politics. He can be reached at
     
    Last edited: Oct 18, 2014
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  3. Ray

    Ray The Chairman Defence Professionals Moderator

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    This is in direct retaliation to the Russian oil threats to Europe?
     
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  4. Virendra

    Virendra Moderator Moderator

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    Or an indirect consequence of gradual slowdown in Chinese economy?
     
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  5. amoy

    amoy Senior Member Senior Member

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    UPDATE 3-Russian central bank prepares strategy for sharp oil price drop | Reuters


    * Central bank mulls possibility of oil price falling to $60

    * Price fall would undermine budget and rouble

    * Analysts say scenario unlikely but warn of risks

    * IMF halves 2015 growth forecast to 0.5 pct (Changes sourcing, adds comment)

    By Lidia Kelly and Darya Korsunskaya

    MOSCOW, Oct 1 (Reuters) - Russia's central bank said on Wednesday it is working on measures to support the economy should oil prices fall by as much as a third or more, showing growing concern as the rouble slides and Western sanctions take a toll.

    Punitive measures by the West over Moscow's role in the Ukrainian crisis have pushed the economy of President Vladimir Putin's Russia towards stagnation. The International Monetary Fund halved its growth forecast for 2015 to just 0.5 percent. The World Bank estimates the economy will expand next year by only 0.3 percent.

    The Central Bank told Reuters it is developing a "stress scenario" that envisages a drop in the oil price down to $60 per barrel.

    This would be added to three existing scenarios for the central bank's policy outlook for the next three years, and compares with a $100 assumption in the 2015-17 state budget adopted last week.

    "The Bank of Russia is developing a stress scenario with a significant deterioration in the external economic environment compared to its (current most pessimistic scenario)," the bank said in an email statement.

    "In the stress scenario, it is proposed to assume even a more pronounced deterioration in the price of oil, up to the level of $60 per barrel."

    The bank's current most sober outlook envisages oil falling to $86.5 per barrel by 2017. Its base scenario assumes the oil price will be above $100 per barrel for the next three years. Even then, it predicts only modest economic growth.

    Oil and gas produce about a half of Russia's federal government revenues. Already the price of Urals URL-E, Russia's chief crude blend, has fallen to around $92, while companies are struggling to raise capital due to Western sanctions imposed over Russia's actions in Ukraine.

    The IMF's mission head to Russia, Antonio Spilimbergo, said the uncertainty about international tensions present downside risks to the IMF's already lowered growth forecast.

    "There are considerable risks and the risks are related to the continuation or worsening of the geopolitical situation," he said. "Uncertainty makes investors very reluctant to invest in Russia."

    Commenting on the bank's new stress scenario, Finance Minister Anton Siluanov said that his ministry didn't plan to adjust its own projections used for budget planning, which he said factored in a possible oil price as low as $80 per barrel.

    "The forecast of the central bank somewhat differs from that of the government. There is nothing terrible about the fact that they consider a wider range of possible changes in price parameters," he said. "I consider ($60 oil) unlikely."

    While playing down the likelihood that oil would fall so sharply, Siluanov has also warned repeatedly that a lower oil price is one of the biggest risks that the economy faces, requiring budgetary prudence.

    The central bank told Reuters that there is an "ongoing discussion" about its draft, but the scenario will be included in the bank's final version of its 2015-2017 monetary policy.

    Timothy Ash, head emerging markets strategist at Standard Bank in London, said the Russian economy would be in serious trouble if crude fell to $60. This would lead to "deep recession, large current account and fiscal deficits, huge levels of capital flight, and significant stress on banks", he said.

    BUDGET HOLE

    Alexei Kudrin, a former finance minister and influential figure in the Russian political elite, said recently that he foresees crude prices continuing to decline over the years ahead because of new oil production technologies.

    In three to four years, he predicted, declining revenues from oil taxes would create a $30-40 billion hole in Russia's government finances.

    Some other analysts are also worried that the official economic projections take too little account of the risk that oil prices could fall significantly.

    "It's prudent policy making. I think it's sensible to consider a sharp fall in oil prices," said Neil Shearing, chief emerging markets economist at Capital Economics in London.

    Were prices to fall to $60 per barrel next year and stay there, the budget deficit would widen to 4.5 pct of gross domestic product, he calculated - a huge burden given Russia's limited access to international capital markets.

    That contrasts with official projections, based on oil around $100 per barrel, that see the deficit at 0.5-0.6 percent of GDP in 2015-17.

    An added headache for Russia would be the negative shock to its balance of payments. "One thing that would happen is the rouble would fall sharply," Shearing said.

    "We would start to see the central bank consider more of the non-standard measures to try to defend the currency. Capital controls may well come into place... The bigger the dislocation in markets, the more chance there is of more draconian and drastic responses from the central bank."

    Macro-Advisory analyst Chris Weafer said in a note that the talk of emergency measures such as capital controls did not indicate any fundamental shift in policies. Such contingency planning was normal good business practice and "does not indicate that the central bank, or the Kremlin, has changed its position", he said.

    Were oil to fall below $75 per barrel, the central bank could be inclined to back-track on its plans to float the rouble next year, he said, but added that this scenario was unlikely. "The main OPEC countries would experience budget difficulties long before that and would have to take action to cut supply," he said.

    A sharp drop in oil prices may, however, complicate Putin's plans.

    "I am not forecasting a collapse in the government in the next 12-18 months and it's more likely than not that (Putin) will get reelected in four years time," Shearing, of Capital Economic said.

    "But nothing is forever and a period of much lower oil prices and the economic pain they would afflict would have big political consequences in the end." (Additional reporting by Jason Bush; Writing by Lidia Kelly and Jason Bush; Editing by David Stamp and Peter Graff)

    [​IMG]

    Rouble vs. US$
    [​IMG]
     
  6. sob

    sob Moderator Moderator

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    So Putin is going to be screwed by the US and it's allies.

    For KSA it is very clear-- they are out to kill the competition. Reports suggest that they can sustain prices in the region of US $ 60 for a long time. Their cost of E&P is said to be the lowest in the world. Countires like Iran and Venezuela along with Russia are in for a rough time.
     
  7. JBH22

    JBH22 Senior Member Senior Member

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    Nopes its an old gameplan of Yankees.

    They use the same tactic to give Soviet economy knock out punch during Gorbachev Glasnost Period. They knew Soviet ruble was non convertible currency and had minimal FOREX reserves, so they asked their pals Saudis to lower oil price.

    Now uncle sam playing same thing with help of KSA to screw Russkies.
     
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  8. Virendra

    Virendra Moderator Moderator

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    Could TAPI kind of projects have helped Russians?
     
  9. tramp

    tramp Senior Member Senior Member

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    It's just an extension of the US fracking frenzy that is pounding down oil prices and making Russia squirm. Despite their $30b oil deal with China, Russian economy is a tailspin because of the sanctions and plunging oil prices. US wants to preempt ME clients from moving to Russia and that is why the price cut.

    Along with Russia many Gulf states are facing the pressure of plunging oil... but for US and Saudis Russia is the priority because of Moscow's support to Syria and Iran.

    Alongside, US gets to give a couple of knocks on Venezuela.

     
    Last edited: Oct 18, 2014
  10. asianobserve

    asianobserve Elite Member Elite Member

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  11. amoy

    amoy Senior Member Senior Member

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    That's hurting lots of competitors [​IMG]

    Even Saudi has to sell more quantity to balance the budget.
     
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  12. amoy

    amoy Senior Member Senior Member

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    Oil consumers shall take this chance of plunging crude price (Brent below 80$ pb already?) to build up reserves to weather future price rebounds.

    [​IMG]

    The primary external provider of US energy needs is no longer Saudi Arabia, but Canada. China may increase from Russia by pipeline to ease the Malacca dilemma.
     
  13. sob

    sob Moderator Moderator

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    The problem with the Russians is that their economy is in shit hole and Putin is spending huge money on Defence. Plus it is a very inefficient economy. Years of high Oil and Gas prices have sustained their economy. @amoy has given a very interesting chart. The Russian economy when into trouble the moment Oil prices went below US $ 100 per barrel. If it goes to 70 then we have big trouble.
     
    Last edited by a moderator: May 10, 2015
  14. sob

    sob Moderator Moderator

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    @amoy thanks for this graph.

    KSA is the big daddy of oil producers. They are one of the few countries which produces the sweet low sulphur oil and also the kind of heavy oil which Venezuela produces and only a handfull of refineries around the world, can handle. With the prices dropping they will stop producing from the high cost wells and concentrate on the more profitable wells. Plus they have a huge surplus cash lying around.

    In a war of low prices they can afford to undercut the others.
     
    Last edited by a moderator: May 10, 2015
  15. tramp

    tramp Senior Member Senior Member

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    The price wars is music to Indian ears as the current account deficit will come down. Augurs well for Modi govt in that ever since he took over, there have been a lot of good news.

     
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  16. Virendra

    Virendra Moderator Moderator

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    And what is the time tested method to shore up Oil prices? ;)
    Interesting time ahead.
     
    Last edited by a moderator: May 10, 2015
  17. jamesvaikom

    jamesvaikom Regular Member

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    Saudi is doing this to reduce competition. Low oil price will force shale oil companies to reduce investments. Low investments will help Saudi increase oil price without reducing production. What we should do is to use reduction in oil subsidy due to low oil price to provide more subsidies to solar and wind power projects and also invest more money in railways and oil pipelines. We should reduce dependency on oil to protect as from oil shocks in future.

    During 1980s Saudi reduced competition with similar trick. This time consumers like India and Brazil should act with long term vision. Brazil should use reduction in oil subsidies to fund deep water oil exploration.
     
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  18. amoy

    amoy Senior Member Senior Member

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  19. amoy

    amoy Senior Member Senior Member

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    Saudi's Naimi rejects oil price war talk, seeks only stability | Reuters

    What's the impact of US shale gas exploration?:violin:
     

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