Baku, Azerbaijan, Dec.4
By Dalga Khatinoglu - Trend: Oil prices have tumbled by a third since summer, but none of oil producers have cut crude production yet.
The U.S. crude futures settled up 50 cents at $67.38 per barrel on Dec.3, while OPEC oil basket stood at $68.13 on Tuesday according to the latest updates on the Cartel's official website.
Among the most vulnerable producers, it was expected that Russian operative deep-water oil fields as well as American shale oil with its high production costs would cut output when prices went below their break-even cost.
However, Russia announced earlier that it would keep crude oil production level unchanged even if the price on a barrel of oil fell to $60. On the other hand, and only 4 percent of the U.S. shale production needs above $80/barrel oil prices to be profitable.
The International Energy Agency estimated that most the U.S. "tight oil" production -in the Bakken formation, one of the main drivers of shale oil output- remains profitable at or below $42 a barrel.
As the EIA estimated, the U.S. shale oil (tight oil) production soared in 2012 and the growth rate is expected to reach one million barrels per day next year.
Sohbet Karbuz, Director of Hydrocarbons, France, Mediterranean Energy Observatory (OME) told Trend on Dec.4 that Russia has to continue producing the same amount because it has to. Due to western sanctions, the rubble depreciated 30%, access to financing is becoming increasingly difficult with zero economic growth expected next year, pushing the country's economy into a corner.
Karbuz says that in the US large amount of shale oil production is still profitable under current prices. According to him, they still have to fulfill their commitments. "We cannot expect them to stop their activities immediately just because prices went below their break-even cost. It will take some time".
Separation among OPEC members
The 12-nation Organization of Petroleum Exporting Countries (OPEC) kept its output target unchanged at 30-million barrels per day during a meeting held on Nov.27.
Despite the ceiling level of 30 mbpd by OPEC, 12 members of this cartel produced 30.253 mbpd in October, according the OPEC's latest monthly report. This is while OPEC says that the demand for OPEC crude is estimated at 29.5 mbpd in 2014. In 2015, the figure is estimated to reach 29.2 mbpd.
Saudi Arabia as the biggest OPEC producer, which shares one third of the Cartel's output, isn't keen to keep oil production low in attempts to protect their share in international markets.
Karbuz believes that in fact, when we talk of OPEC, we indeed really talk about Saudi Arabia.
"They are the one who shape OPEC decisions and they are the heaviest weight in determining the direction of the oil prices. With its latest action Saudi Arabia wants the make sure that this issue is plated on the brains of other OPEC members. This is also a warning to the other members that if Saudi Arabia decides later to a production cut the others must obey it. In other words, Saudi Arabia is showing its stick to achieve OPEC discipline."
The IMF has estimated Saudi Arabia will need an average oil price of $90.70 a barrel in 2015 to balance its budget, however, Anne Korin an adviser to the United States Energy Security Council told Trend on Dec. 3 that "Saudi Arabia has about $750 billion in cash reserves, which explains their willingness to tolerate a lower price.
However, for some other OPEC members like Iran, the low oil price is a real catastrophe.
Iran has set the yearly budget based on 100/barrel oil price and Iran's fiscal year will end on March 20, 2015, about three months later than the Gregorian calendar.
Iran needs $50 billion investment in its upstream sector to increase oil output to a target of 5.7 million per day. Iran is producing about 3.3 million barrels of crude oil, condensate and NGLs, of which 1.1 million barrels per day is being exported.
Karbuz noted that for OPEC basket price to damage the members' upstream projects it would have to still go further down because development and production costs are low compared to (deep) offshore, shale and tar sands.
"However, we should keep in mind that upstream projects are long term projects and sanctioning of those projects depend more on the expected oil price in the future and ability to finance the project and ability to access the financing today. Currently the biggest uncertainty is about the duration of the low or falling oil price environment. If prices don't recover back to the three digit number then we could talk about damage to upstream projects," he said.
Edited by CN
Dalga Khatinoglu is an expert on Iran's energy sector, head of Trend Agency's Iran news service
Follow him on @dalgakhatinoglu