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Thursday, November 6, 2014

Falling Oil Prices and Middle-Eastern Stability

OPEC is scared of the fracking revolution in the United States. Notwithstanding its lobbying efforts to close federal land to oil drilling, and its investments in environmental groups opposed to oil production, OPEC is now engaged in a price war over oil. Writes Andrew Critchlow:
Oil prices were in free fall on Tuesday morning after it emerged that Saudi Arabia, the world's largest exporter, had slashed its contract price for its US customers in a further sign of an escalating war for control of global energy markets. 
Brent crude ...  fell 2.5pc to $82.62 in the mid-morning trading session in London. 
US crude futures are now trading at around $76 per barrel, a figure that will squeeze the profitability of shale oil producers in the US who are seen to be the biggest threat to the domination of the Organisation of Petroleum Exporting Countries (Opec) in terms of controlling the price of crude.

...  Tuesday's falls were triggered by state-owned Saudi Aramco - the world's largest state-owned oil company by production and reserves - slashing the contracted price for its sale of crude to the US.

Opec, of which Saudi is the leading member - has been losing market share to shale oil producers in the world's largest economy with Nigeria recently dropping out of the list of member countries that supply North America.
 
At the same time, Opec members are producing too much crude to meet falling demand for the current market driving down prices further. According to estimates of the International Energy Agency, the call on Opec in the fourth quarter will total 30.3 million barrels per day, while next year it will fall to just 29.3 million barrels per day. 
Pressure is on the 12-member cartel - which controls about a third of the world's oil supply - to cut production at its next meeting on November 27. However, its leading producers led by Saudi appear to be willing to keep the spigots open in order to defend market share and cripple some of their major rivals. 
Russia, which pumps over 10m barrels per day of crude, has been a major loser in the current oil price rout. Deutsche Bank now expects Russia’s economy to contract by 0.2pc next year, recovering slightly in 2016 to a moderate growth rate of 0.8pc. Russia’s main export blend Urals oil is priced off Brent, the benchmark for about half the world’s oil.
As has been noted before, social welfare spending and subsidies in many OPEC nations is so high, that those countries must maintain high oil prices and sales volume. Saudi Arabia and some of the other Gulf states may have sufficient reserves to sustain a protracted price war, but I doubt that other more populous nations will be able to do so. I don't see OPEC reducing production either because it would drop the volume of their sales, which would have the same effect as dropping prices--not enough revenue.

In short, OPEC nations face budget shortfalls which may require them to reduce social welfare spending, with a concomitant rise in discontent.

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