LONDON: Three months after Saudi Arabia made clear it was going to let oil prices keep tumbling, the strategy is showing signs of working.
US drillers are idling rigs at a record pace, gutting investment plans and laying off thousands of workers.
Those steps highlight how the Saudi-led Opec decision on Nov 27 to maintain output levels and protect its market share is having the desired effect — pushing prices down so far that they threaten to curb output in the United States and other non-Opec countries. Saudi Arabia, the most powerful member of the Opec, will maintain that tack when the group next meets in June, according to some of the world’s biggest banks.
“Opec giving up on trying to control the price is working,” Francisco Blanch, head of commodities research at Bank of America Corp. in New York said by phone. “It is having the effect that we would expect, which is a decline in investment and ultimately supply, and somewhat higher demand. We think this change is for good.”
The number of rigs drilling for oil in the US dropped by 37 last week to 1,019, the fewest since July 2011, data from Baker Hughes Inc showed Feb 20. Since Dec 5, a total of 556 have been taken out of service. Oil explorers including Royal Dutch Shell and Chevron have announced spending cuts of almost $50 billion since Nov 1.
Transocean, the world’s largest offshore driller, had its credit rating cut to junk Feb 25 by Moody’s Investor Service on concern the company will increase debt levels while the drilling market deteriorates. It has about $9bn of borrowings.
Oil has rebounded 10 per cent in New York since Jan 29, following a drop of more than 50pc from June, in part because of the decline in drilling, which signalled supply growth will slow. Lower prices also spurred demand from bargain hunters, putting European benchmark Brent crude on track for its first monthly gain since June.
Demand is growing and markets are “calm,” Saudi Arabian Oil Minister Ali Al-Naimi said Feb 25 in the Red Sea city of Jazan in the nation’s southwest.
US oil production will cease its month-on-month growth in April because of the drop in the rig count, Marios Maratheftis, the Dubai-based global head of research for Standard Chartered Plc, said in Dubai on Feb 23.
The US EIA reduced its 2015 US crude production forecast to 9.3 million barrels a day in February from 9.42m in November. The EIA projects output will fall in the third quarter for the first time in four years.
“Opec’s long-game strategy is on track,” Harry Tchilinguirian, head of commodity markets strategy at BNP Paribas in London, said by email. “It’s suffering short- term financial pain for long-term gain.”
There is a cost to Opec, of course.
Oil’s plunge will reduce the group’s revenue by about 37pc this year, according to the US EIA. Export revenues for 11 of Opec’s 12 members, excluding Iran, will shrink to $446bn in 2015 from $703bn in 2014, the EIA estimates.
Saudi Arabia’s government said Dec 25 that it expects a budget deficit in 2015 of 145bn riyals ($38.7bn), up from 54bn in 2014.
The Saudi strategy has been criticized by Venezuela, which the IMF estimates will suffer an economic contraction of 7pc this year, and Iran, which the IMF says will be deprived of $48bn of revenues over two years. The Nigerian oil minister and current Opec president, Diezani Alison-Madueke, said she may convene an emergency meeting of the group, the Financial Times reported Feb 23.
There’s no plan for such a gathering, according to a delegate who asked not to be named. Opec’s financially vulnerable members have little sway over policy because they’re unwilling to cut production, leaving decision-making power with S. Arabia, according to Mike Wittner, head of oil markets research at Societe Generale in New York.
By arrangement with Washington Post-Bloomberg News Service
Published in Dawn March 1st , 2015
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