The end to the bottom could be quicker than we think.
It looks like OPEC will blink first;
The timing for FAR could be impeccable.
OPEC potentially restricts supply, Shale capitulates - FAR and the JV release detail on IMHO the biggest find since the GOM.
Interesting times ahead...
By
Ambrose Evans-Pritchard
8:45PM GMT 14 Dec 2015
14 Comments
Opec will be forced to call an emergency meeting within weeks to stabilize the market if crude prices fail to rebound after crashing to eight-year lows of $35 a barrel, two of the oil cartel's member states have warned.
Emmanuel Kachikwu, Nigeria’s oil minister and Opec president until last week, said the group is still hoping that the market will recover by February as low prices squeeze out excess production from US shale, Russia and the North Sea, but nerves are beginning to fray.
“If it [the oil price] doesn’t [recover], then obviously we’re in for a very urgent meeting,” he said. Indonesia has issued similar warnings over recent days, suggesting that the Opec majority may try to force a meeting if Saudi Arabia’s strategy of flooding the market pushes everybody into deeper crisis.
The comments came as Brent crude plunged to $36.76 as the fall-out from Opec’s deeply-divided meeting earlier this month continued. Prices are now within a whisker of their Lehman-crisis lows in 2008. West Texas crude dropped to $34.54 before rebounding in late trading.
Lower quality oil is already selling below $30 on global markets. Basra heavy crude from Iraq is quoted at $26 in Asia, and poor grades from Western Canada fetch as little as $22. Iran’s high-sulphur Foroozan is selling at $31.
The oil market is now in the grip of speculative forces as hedge funds take out record short positions and exchange-traded funds (ETFs) liquidate paper holdings, making it extremely hard to read the underlying conditions.
Russian finance minister Anton Siluanov said his country is bracing for the worst. “There is no defined policy by the Opec countries: it is everyone for himself, all trying to recapture markets, and it leads to the dumping that is going on,” he said.
“Everything points to low oil prices next year, and it’s possible that it could be $30 a barrel, and maybe less. If someone had told us a year ago that oil was going to be under $40, everyone would've laughed. You have to prepare for difficult times."
The rouble fell to 71 against the dollar, helping to cushion the blow for the Kremlin’s budget but also further eroding Russian living standards. Elvira Nabiulina, the head of Russia’s central bank, said the authorities are now preparing for an average price of $35 next year, a drastic cut even from the earlier emergency planning.
Bank of America says Opec is effectively suspended as Saudi Arabia wages a price war within the cartel against Iran, its bitter rival for geo-strategic dominance in the Middle East. This duel is complicated yet further by a parallel fight with Russia outside the bloc
Mike Wittner, from Societe Generale, said the Saudis' motive for floating a proposal at the Opec summit for a 1m barrel per day (b/d) output cut if Russia, Iraq and others agreed to join in was tactical, chiefly in order to demonstrate to critics at home that no such deal could be forged.
He said the strategy to flood the market was not taken lightly and has support from the “highest possible level”. Part of the goal is to discourage energy efficiency and deter investment in renewables.
Global oil demand is rising briskly. This is a 'positive supply shock', not a collapse in demand
Opec is not due to meet again until June 2016 but by then a string of its own members could be facing serious fiscal crises. Even Saudi Arabia is freezing public procurement and drawing up austerity plans to rein in a budget deficit near 20pc of GDP.
In one sense this is a huge transfer of wealth to the US, Europe, China, India and the consuming nations. Opec revenues have collapsed from $1.2 trillion a year in 2012 to nearer $400bn next year, if prices stay this low. JP Morgan said the latest fall is likely to boost global economic growth by 0.3 percentage points next year.
Yet the situation is fraught with hazard. Saudi Arabia has stopped acting as the “central bank” of the crude markets and is no longer steering prices to ensure long-term global stability.
Spare capacity has fallen to wafer-thin levels of 1.5m b/d. This is in stark contrast to the oil slump in the mid-1980s, when spare capacity was around 10m b/d and the Saudis could flood the markets and drive out high-cost competitors without depleting the world’s safety buffers.
Any serious political upset in a country like Iraq – or a terrorist pipeline attack in the Gulf - could trigger a violent reversal and a global oil shock at any moment. “It is a lot more dangerous than in the 1980s,” said Miswin Mahesh from Barclays.
Barclays said oil is unlikely remain near $30 levels for long whatever happens, given that Libya is still in political chaos and Iran will struggle to crank up its output as fast as planned after sanctions are lifted next year. Iran’s effective exports have actually fallen by 100,000 b/d in recent months as old fields decline.
Mr Mahesh said output is expected to fall by 100,000 b/d in Algeria next year due to high depletion rates, with drops of 80,000 b/d in Venezuela, 50,000 in Qatar and 45,000 in Ecuador,
North Sea oil production is likely to fall by 180,000, and Russia and central Asia by 190,000. The US is more resilient, since rising output in the Gulf of Mexico offsets most of the 400,000 decline in shale.
On the other side of the ledger, Chinese oil demand is booming. Barclays said it has jumped by 600,000 b/d over the past year, double the previous growth rate even after stripping out strategic storage. The country has added 20m cars to its national fleet in 12 months.
The paradox of the oil market is that a glut disguises the tightest balance of supply and demand in modern peacetime history.
(20min delay)