2180. Saudi Arabia Keeps Pumping Oil, Despite Financial and Political Risks

By Stanley Reed, The New York Times, January 27, 2016

Call it the Saudi calculus.

Oil prices were already plummeting 14 months ago when, at Saudi Arabia’s insistence, OPEC put the global petroleum industry on notice: The member countries would not try to prop up prices by cutting production.

“We don’t want to panic,” Abdalla el-Badri, secretary general of the Organization of the Petroleum Exporting Countries, told reporters at the group’s November 2014 meeting in Vienna. “We want to see how the market behaves.”

Since then, the market has behaved in a way few could have predicted — including Saudi Arabia, the world’s biggest oil exporter. The price of oil has collapsed under the weight of a growing international glut, made worse by slower growth in the global economy.

And yet the Saudis keep pumping oil at virtually full capacity. And they have persuaded their Persian Gulf OPEC allies — Kuwait, the United Arab Emirates and Qatar — to do the same, despite mounting pressure from other big OPEC members to curtail production.

It is a risky strategy — one that is already straining Saudi finances and threatening the kingdom’s ability to continue providing generous social programs, like subsidized housing and cheap energy, that the royal family has long used to buy domestic tranquillity.

Oil provides more than 70 percent of Saudi government revenue. And though the Saudis still have about $630 billion in financial reserves, they are spending them at a rate of $5 billion to $6 billion a month, according to Rachel Ziemba, an analyst at Roubini Global Economics in New York.

But so far, Saudi Arabia is essentially betting that it can win an oil-price war of attrition — not only against its OPEC rivals like Iran, Iraq and Venezuela, but also against non-OPEC rivals like Russia and the many shale-oil producers in the United States that have contributed to the global glut.

The Saudis argue that throttling back oil production for a short-term pop in the price would be throwing a lifeline to the shale producers in the United States, some of which have already shown signs of wilting in the current environment.

Already, oil producers have dropped their rig count in the United States as bankruptcies spread in the oil patch. But daily production has remained resilient as the wells that remain become more efficient and as major oil projects in the Gulf of Mexico, conceived in an era of $100-a-barrel oil, come online.

On top of this, Iran can increase exports now that Western sanctions have been partly lifted, potentially raising its daily production well above the current level of 2.9 million barrels a day.

With the world awash in oil, the Saudis fear that cutting back might achieve nothing but erosion of their own share of the market — which is one of every nine barrels produced worldwide.

All of this adds up to oil prices that are not likely to rise significantly higher any time soon, unless the Saudi kingdom suddenly changes course.

“If prices continue to be low, we will be able to withstand it for a long, long time,” Khalid al-Falih, the chairman of Saudi Aramco, the kingdom’s national oil company, said last week at the World Economic Forum in Davos, Switzerland.

On Wednesday, Brent crude, an international benchmark, was trading around $31.80 a barrel. That is above the 12-year low of about $27 that oil hit last week. But it is still down more than 70 percent from the level of about $114 in mid-2014, before the price began collapsing.

As daring, or even self-defeating, as the Saudi approach might seem, it is a policy born of pragmatism. Whatever Saudi Arabia does with oil production, its two big OPEC neighbors — Iraq and Iran, the Saudis’ biggest regional rival — might have their own economic and geopolitical reasons to keep pumping or even raising output. And Russia, a big non-OPEC producer, is embroiled in a financial crisis from plunging oil prices and Western sanctions that might give it little choice but to maintain production and take whatever revenue it can.

The Saudis also need a high level of production to support their export network and their domestic refineries and petrochemical industry.

“In order to maintain an efficient economy in terms of investment you can’t be pushing your production up and down a half a million barrels every time the market requires it to prop up prices,” said Sadad al-Husseini, a former executive vice president of Saudi Aramco, who now runs Husseini Energy, a consulting firm with offices in Bahrain and

Still, the Saudis know that they are in for tough times and that their dependence on oil has left them vulnerable.

At a time of great political ferment in the Middle East, the plunging oil prices have gutted the export revenue that drove economic growth in Saudi Arabia and other Persian Gulf countries in recent years. The Saudi kingdom is staring at a growing budget deficit and facing the specter of an economic recession.

The Saudi government has already had to curtail some of its generous social subsidies, recently increasing consumer gasoline prices. And in hopes of finding a new way to monetize its oil assets and begin diversifying its oil-dependent economy, the kingdom has even floated the idea of a public stock offering for Saudi Aramco.

“As far as I am concerned, the strategy is not working,” Nordine Ait-Laoussine, a former energy minister of Algeria, an OPEC member, said of the Saudi commitment to high oil production.

Mr. el-Badri, the OPEC secretary general, who is Libyan, has evidently watched the market’s behavior for long enough. This week, he called for a collective effort to reduce the global oil glut.

“It is crucial that all major producers sit down to come up with a solution to this,” he said on Monday in a speech at Chatham House, a research institution in London.

Venezuela has been pressing for an emergency meeting of cartel members.

But the Saudis are standing firm. “Our investments in capacity of oil and gas have not slowed down,” Mr. al-Falih, the Saudi Aramco chairman, said on Monday.

The Saudis still speak darkly of the 1980s when as OPEC’s “swing producer” they curtailed production to prop up prices but ended up badly burned when other producers did not go along. Seeing its oil revenue and market share shrink, Saudi Arabia fought back with its own price war.

With OPEC having about one-third of the world market, for the Saudis to agree to a cut would mean persuading producers outside the organization, potentially including Russia, to make comparable trims. Analysts say that such a deal would be difficult to arrange, though it could eventually become necessary.

“I can imagine a set of circumstances that could develop this year, including a fall in U.S. output, where the economic pain would force countries to act to stabilize the price,” said Jason Bordoff, a former energy adviser in the Obama administration who is now the director of the Center on Global Energy Policy at Columbia University.

But Mr. Bordoff and other analysts say that from a Saudi perspective this is not an opportune time to consider cuts. Not only is Iran’s re-entry on the global market expected to increase supplies, but Iraq has also been increasing production rapidly.

Still, though the Saudis are burning through their financial reserves, there is no danger of depleting them soon.

Because of that, Bhushan Bahree, an OPEC analyst at the energy consulting firm IHS Energy in Washington, expects the Saudis to stay the course.

If Saudi Arabia cuts production on its own, Mr. Bahree said, “What is next? Iran produces more; Iraq produces more. So what have they done? Pushed the price up temporarily but lost market share, which they may have difficulty recovering.”

2159. A Growing Oil Glut Is Hurting the Economy

By Clifford Krause, The New York Times, January 15, 2016

HOUSTON — The world is awash in crude oil, with enough extra produced last year to fuel all of Britain or Thailand. And the price of oil will not stop falling until the glut shrinks.

The oil glut — the unsold crude that is piling up around the world — is a quandary and a source of investor anxiety that once again rattled global markets on Friday.

As prices have dropped, the amount of excess production has been cut in half over the last six months. About one million barrels of extra oil is now being dumped on the markets each day.

But that means the glut is still continuing to grow, and it could take years to work through the crude that is being warehoused, poured into petroleum depots or loaded onto supertankers for storage at sea.

The shakeout will be painful, taking an even bigger toll on companies, countries and investors.

Global stocks sank sharply on Friday, as the price of oil slipped below $30 a barrel. The glut was at the heart of the tumult, as investors worried that the demand from China would drop and supplies from Iran would grow.

“The glut is the 800-pound gorilla in the room,” said Steve McCoy, vice president for drilling contracts at Latshaw Drilling, an Oklahoma service company that prospered in recent years from the American shale boom. “The world simply produced too much, and now we have to use it up or many oil-producing countries and some oil companies may drown.”

Just a couple of years ago, producers and petro-states were making vast fortunes drilling and pumping relentlessly to fuel expanding middle classes in Asia, Latin America and Africa. But suddenly they are producing more than anyone needs at a time when China and other rapidly growing economies, once hungry for energy, are pulling back.

The extra oil has sent the price of crude into a tailspin, down more than 70 percent over the last 18 months.

That, in turn, has helped depress stock markets around the world, as investors worry about global growth. The Standard & Poor’s 500-stock index is off around 8 percent in just the first two weeks of the year; European shares are down even more. Chinese stocks have dropped 20 percent from their December peak, putting the market in bear territory.

“What was once viewed as a gift is now viewed similarly to the gift of the monkey’s paw,” said Tom Kloza, global head of energy analysis for Oil Price Information Service. “Global financial damages trump the benefits of cheap oil at anything under $30 a barrel.”

It could get worse.

The nuclear deal with Iran should allow the country to start exporting far more oil, once sanctions are lifted, potentially in a matter of days. Iran could add as much as 500,000 barrels a day to the global markets.

Tentative progress in negotiations between warring factions in Libya, battling for control of oil and export terminals, could unleash another flood. And Saudi Arabia, Kuwait and Iraq continue to maintain a pumping frenzy to grab Asian markets.

The United States is slowly cutting production. Major oil companies have dropped their rig count, and dozens of small businesses have gone bankrupt. But the industry cannot simply flip the switch on big projects, like deepwater production projects in the Gulf of Mexico, that require companies to keep pumping to cover their costs. Smaller companies have to keep producing from shale fields, even at a loss, to keep paying their lenders.

“Sheikhs and shale caused this,” said Scott Tinker, director of the Bureau of Economic Geology at the University of Texas at Austin. “They are both producing more oil. That is the fundamental driver.”

A million to two million barrels a day of excess production may not seem like much in a world market that requires 94 million barrels daily. But the amount of daily oversupply in recent months is the largest since oil prices collapsed in the late 1990s.

Back then, the price dropped below $10 a barrel, on an inflation-adjusted basis. Oil from new fields flooded the market just as the Asian financial crisis was roiling emerging markets.

Most of the glut today can be explained by a near doubling of American domestic oil production since 2008. The shale boom added roughly three million barrels a day to the global market.

In the past, when markets got out of kilter, Saudi Arabia and its partners in the Organization of the Petroleum Exporting Countries slashed production to support prices. But this time, the Saudis and other big producers increased output to try to preserve market share and undercut higher-cost competitors like those drilling in the shale fields of Texas and North Dakota.

Even as prices slipped through 2015, global production climbed. The Energy Department projects that overall inventories will rise by an additional 700,000 barrels a day in 2016.

The balance of oil supply and demand can swing abruptly, along with price, as they did in the early 2000s.

At the time, the Chinese and other emerging-market economies went into overdrive just as production in the United States and Mexico was declining and big producers like Venezuela and Nigeria were facing political turbulence. By mid-2008, the price of oil had risen to nearly $150 a barrel.

That is the possibility that many analysts are now contemplating, even if not at a price that high. An unexpected drop in supply or rise in demand could create a floor for prices, ease the glut and eventually lead to a slow recovery.

On the supply side, if tensions erupting between Saudi Arabia and Iran lead to armed conflict or an insurrection, the excess production could quickly disappear.

The boom in Iraqi oil production faces multiple threats, including Islamic State terrorism. The government is falling behind in its payments to international oil companies, water is running low for pumping to revive aging oil fields, and northern Kurdish fields are short on pipelines.

Low oil prices have already constrained exploration and production investment around the world.

American oil producers are in retreat; companies have decommissioned more than 60 percent of their rigs in the last year or so. Since peaking at 9.7 million barrels a day early last year, domestic oil production has fallen by more than half a million barrels. Rosneft, Lukoil and Western companies are also dropping big projects in Russia.

Some analysts also say that the concerns about slowing demand in emerging markets, a byproduct of the economic weakness, are overblown. China and India, for example, are working hard to build up enormous strategic reserves, which adds to the demand.

RBC Capital Markets, a division of Royal Bank of Canada, estimates that China’s needs will continue to grow as it places an additional 65 million to 70 million barrels in its reserves this year. India began amassing a strategic reserve only last year, and it has a goal of storing roughly 330 million barrels over the next several years.

“Increased demand can certainly help,” said Michael Tran, an RBC commodity strategist. “But the growing supply glut is what ultimately got us below $30-a-barrel oil, and significant supply cuts are what will ultimately have to dig us out.”