The Saudis may go public, OPEC’s in disarray, the U.S. is suddenly a global exporter, and shale drillers are trying to find lifelines from investors as banks abandon them.
Oil rally fuelled by OPEC noise, just ‘bulls clutching at straws’
Citibank analysts were built with a succinct warning about the rally: Oil bulls are “clutching at straws,” i was told that.
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Welcome to oil’s new world order, full of stresses, strains and fractures. For leaders gathering in Houston in a few days at the IHS CERAWeek conference – often dubbed the Davos from the energy industry – a key question is: what will break first? Will it be the balance sheets of big U.S. shale companies? The treasuries of Venezuela and Nigeria? The resolve of Saudi Arabia, whose recent deal with Russia to freeze output levels offered the very first hint of a rethink?
After watching prices crash through floor after floor in the worst slump for any generation, the industry is eager for answers. Insiders say it’s not too hard to visualize what markets might look like after the storm – say five years down the line, when today’s cost-cutting results in a supply vacuum which will push-up prices. But it’s what happens in the meantime that’s got them scratching their heads.
“This can be a weird thing for any market analyst to state because it’s usually the opposite case, however i convey more conviction within my five-year outlook than my one-year outlook,” said Mike Wittner, head of oil researching the market for Societe Generale SA. “Maybe I’m letting my head get turned upside down through the last couple months.”
Seeking clarity at closed-door sessions, cocktail hours and water-coolers in Houston will be some of the industry’s biggest players, from Saudi Petroleum Minister Ali al-Naimi to Royal Dutch Shell Plc Chief Executive Officer Ben Van Beurden.
In a less volatile year, the long-term viability of non-renewable fuels might have been at the top of their agenda after December’s breakthrough climate offer Paris. But within the industry, that debate has “fallen in to the abyss of US$27 oil,” said Deborah Gordon, director of the Carnegie Endowment for International Peace’s energy and climate program.
“It appears as though it’s no good time,” she said. “You can’t have these conversations when oil is US$125 because then you can’t have it out of the ground suddenly. And you can’t have it at US$27 because you’re just attempting to survive.”
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Shale Boom
U.S. shale drillers had a key role in bringing prices that low, by adding 4 million barrels each day in under four years – similar to a brand new OPEC member materializing overnight. Gas has mirrored the pattern, with surging output and plunging prices.
Now the companies are victims of their own success. As many as 74 face significant difficulties in sustaining debt, according to Moody’s Investors Service. The effective yield from the Bank of the usa Merrill Lynch High-Yield Energy Index rose to more than 21 percent on Feb. 11, the most since it was made in 1997.
So far, shale bankruptcies have been restricted to smaller outfits like Magnum Hunter Resources Corp. and Swift Energy Inc. Some investors are involved that Chesapeake Energy Corp., the second-largest gas producer in the U.S., could be the first big fish from the water: its shares have plunged 90 per cent previously year.
The one thing the stress on companies hasn’t done is destroy production. Engineers have found ways to lower costs and boost output at oil wells, allowing cash-starved drillers to keep enough rigs active so that output is still within 5 percent of last year’s high.
OPEC Output
Meanwhile, around the international scene, the Saudi-Russian accord announced Tuesday, that Venezuela and Qatar also have registered, would cap production at January’s levels – an archive full of Russia’s case, and never remote for that Saudis. Iran isn’t a party towards the plan, and it is imminent return to world markets could add to the glut. Historically no. 2 OPEC producer, the Islamic Republic is getting ready to increase exports after sanctions were lifted recently.
Brent crude didn’t sustain a rally after the plan was announced, suggesting that traders don’t see any change in the actual picture: Suddenly, there’s oil everywhere. Without a rebound in prices, the effects for governments – from Russia to Nigeria to Venezuela – vary from grim to catastrophic.
You’ve got half of OPEC in existential crisis as to whether they may be viable governments at this point
Russia has a relatively diversified economy, but it’s still running the largest deficit in five years, and selling assets to invest in a stimulus program. Nigeria, which depends on oil for most of its exports, is battling to prevent a currency devaluation and pleading for development loans to replace the missing petrodollars. Venezuela is even worse off, with debt defaults looming as well as an inflation rate estimated by the International Monetary Fund at 275 percent.
“You’ve got half of OPEC in existential crisis whether they may be viable governments at this time,” said Allen Gilmer, chief executive officer of energy consulting firm Drilling Info Inc. in Austin, Texas.
Saudi Arabia
As usual within an OPEC meltdown, all eyes have turned to Saudi Arabia, the world’s top exporter and architect of the cartel’s keep-pumping strategy as it seeks to defend market share.
While the Saudis have bigger budgets than most of their OPEC peers, they haven’t been immune in the price turmoil – especially with wars in Yemen and Syria to finance. Reserves tumbled by about US$115 billion this past year. Saudi rulers have slashed subsidies, announced new taxes and said they’re even considering selling shares in the state oil giant, Saudi Aramco.
“We don’t desire a decrease in supply,” Al-Naimi said after the Russian deal. But he also said it was only the “start of a process.”
The Saudi minister will address IHS CERAWeek’s main hall morning, in the week’s most eagerly anticipated event. A packed audience is going to be hoping he elaborates.
“There’s a brief fix, and a long fix,” said Andrew Lebow, a senior partner at Commodity Research Group. “Are we going for rapid fix of a production cut, or the long-haul slog of rebalancing the market? That’s what everyone at CERA will probably be referring to. And it’s all determined by the Saudis.”
Bloomberg News
