Baku, Azerbaijan, Oct. 14
By Dalga Khatinoglu, Umid Niayesh - Trend:
Saudi Arabia wants to find the floor for a 'new fair price', at which the global economy can grow and therefore oil demand can continue to grow as well, Jens Zimmermann, Middle East Energy Markets analyst told Trend on Oct. 14.
"Based on Saudi officials' announcement that they can live with oil prices between $80-$90 per barrel for a limited amount of time (let's say one to two years), I would assume that $85/b would be the oil price they need," he said, adding, "they can keep their economic investment and social spending program going without having to run a budget deficit."
Zimmermann who is a senior analyst at Wood Mackenzie research and consultancy group said that the other oil producing countries are not as lucky as Saudi with the low oil prices.
"See Russia, Iran and Venezuela, who need oil prices above $100/b to balance their budgets," he explained.
It should be noted that Reuters quoted Saudi officials as expressing readiness to accept oil prices below $90 per barrel, and perhaps down to $80, for as long as a year or two.
Zimmermann went on to note that "when Saudi Arabia says it is looking for a 'fair oil price' with which producers and consumers can live, I think that it means what it says."
"So far they thought that this market balancing price was $100/b, but with slower growth in China and Europe (maybe dipping into another recession), they had to realize that demand was too weak to stick to their preferred $100/b mark," he explained, adding "I think that's why they are suddenly willing to accept a lower oil price because they realized there is no point in defending a higher oil price if global demand is too weak."
Of course, they are also in the lucky position that they can afford a below $90/b oil price without hurting their budget, despite some other producers, Zimmermann said.
While commenting on theories which suggest that the Saudi Arabia uses oil as weapon to harm Russia and Iran by letting the oil price drop below $90/b the analyst said that he doesn't believe the conspiracy theories.
However he added that "of course, Saudi Arabia wants to re-assert itself as the 'central banker of oil' and show who has the final say where oil prices should be stabilized."
As a welcomed side effect, they don't mind giving high cost producers like Russia or the US shale oil producers a little bit of a 'sweating' by letting prices drop a little lower, which is clearly also in their interest to demonstrate that they still have power and influence in the oil market (especially at a time when OPEC's influence is declining), Zimmermann said.
While responding a question about effects of the crude price cut in global oil production projects he said that it depends how long oil prices will stay at depressed levels (let's say Brent at $80-90/b).
"If it's only a relatively short (one year) phenomenon, then I think that the impact will be limited because capex(capital expenditures) decisions for large international oil development projects are taken long-term and are rather 'sticky' for that matter, meaning they have long lead times and don't get cancelled very quickly, especially by the major international oil companies and national oil companies, Zimmermann said.
However, if $80/b Brent becomes the 'new reality' going forward, then some exploration of high-cost oil projects (such as deepwater and ultra-deepwater or Canadian Oil Sands) might get delayed or even cancelled, he added.
It should be noted that the international crude prices have sharply dropped in recent weeks.
The Brent crude has dropped almost 25 percent from its 2014 high in June as supplies have risen and global demand has slowed, creating a glut in many markets.
The global oil benchmark fell to a fresh low below $88 a barrel on Oct. 14, trading at the weakest level since 2010 after the International Energy Agency (IEA), cut its estimates for oil demand this year and next, Reuters reported.
Brent crude dropped $1.30 to $87.59, its weakest point since December 2010, before recovering slightly to around $87.81.
U.S. crude also dropped $1.01 a barrel to $84.73 after it pared sharp intraday losses on Oct. 13 to settle down 8 cents, according to the report.
The OPEC Reference Basket (ORB) stood at 85.93 dollars a barrel on Oct. 13, $10.05 under the September average. The ORB declined for the third consecutive month and dropped almost $12 or 11 percent of its value since June to an average of $95.98/b in September.
While responding a question about the consequences of Saudi officials' decision for shale oil projects Zimmermann emphasized that the Gulf Kingdom considers the US shale oil as a serious challenge.
"Saudis are happy to make them sweat a little bit by letting the oil price drop below $90/b, at least temporarily," he said.
There are different break-even WTI (West Texas Intermediate) prices for the US shale oil producers floating around because the break-even costs vary between the different places and how much of a return you want to factor-in, the analyst added.
Zimmermann went on to underline that "for the two biggest producing regions (Bakken and Eagle Ford) I have seen estimates for the marginal break-even cost of producing oil without any return to be around $65-$75/b."
There are many areas that have higher marginal production costs, which need $80/b just to break-even without producing any return on investment, he said, adding while their output is still rather small, these would be the ones that would get hurt first and would have to delay their projects if WTI stays around $80/b for an extended amount of time.