Who's gonna blink first
“the price of $80 per barrel is not in the interest of any large player, and this price level is of no benefit to anyone. The global economy will suffer.” after participating in negotiations on the crisis in ukraine in milan on 17 october, russian president vladimir putin painted red for the continuing fall in oil prices。
Putin’s warning, however, did not resonate with the oil giants, and the organization of the petroleum exporting countries (opec), the global oil supplier, refused to reduce production. Although international oil prices have now fallen by almost 23 per cent from the high point in june this year, this is a sign of the bear market。
Over the past decade or so, the opec has been playing the role of oil price “bell-set” — reducing production for profit. Now, why is the opec so insistent? Who's "cheese" touched by the $80 price
Saudi resolve
In the 13 months leading up to september, opec member countries increased crude oil production for the most part of the time, but as international oil prices approached the $80 mark, they refused to fall to the bottom of the bear market on the grounds that there was no “cut-off”. The main reason for opec's decision is that they wish to use the fall in international oil prices to achieve two objectives: to tame some member states with “personality” within themselves, and to eliminate some powerful competitors from the outside, in order to regain their former “talk” in the oil market. This decision was made mainly by the “parents” of opec, the organization's largest oil producer, saudi arabia。
Although also a member of opec, iran and iraq and saudi arabia, as well as kuwait and qatar, which are behind it, have been following the organization's oil export policy in the south. In recent times, as a result of the geopolitical vortex in iran and iraq, there is an urgent need to balance the national budget through oil exports, which, in turn, exacerbates the division of oil policy among opec member states. In order to fill the oil production gap created by the international sanctions against iran in 2012, saudi arabia increased its oil output and, with the recent return of iran to the nuclear talks, the fifth largest opec supplier might return to the crude oil supply market, but it was reluctant to release quotas for that purpose. In order to regain its share, iran was willing to wage price wars with saudi arabia in asian markets. “since 2009, saudi arabia, iraq and iran have been competing in asian markets. They have no choice but to maintain their market share, although this is not a good way to compete. According to jimmy webster, the petroleum analyst of the united states consulting firm his, “saudi arabia may feel slightly better because he can dominate the price drift”
While pacifying internal differences among opec members, the kingdom also wishes to resist shocks from external rivals by maintaining a low-cost strategy. Although it has also been assuming the role of an important seller in the international crude oil market, the share of the opec in the international crude oil market has fallen from 50 per cent 20 years ago to 30 per cent today, even though it is constantly facing challenges from russia and the united states。
In 2006, russian oil exports surpassed saudi arabia and subsequently accounted for almost one third of the global crude oil market. And with shale oil technology, oil production in the united states was equal to saudi arabia in 2013 and energy independence was achieved as a result. What makes saudi arabia more comfortable is that, as the united states’ energy demand for saudi arabia diminishes, the two countries' previous close ties are beginning to become somewhat alienated. The top three current united states sources of energy imports are canada, nigeria and venezuela. In order to restore its prestige in the international oil market, saudi arabia launched the “price war”. “the kingdom is determined to defend its market share. He even sacrificed his price in asia.” the international energy agency (iea) wrote in a report on 20 october。
However, opec is also changing its strategy in the face of a proliferation of new rivals. “we are more likely to see opec use market forces to reduce production costs first.” anthony harf, head of the iea oil market and industry department, spoke in an interview with bloomberg。
Who blinks first
The cost of oil production does not simply depend on the cost of oil extraction, but is made up of a series of complex variables that mainly cover the costs of oil exploitation, the size of the country's population, the demand for petroleum products, the country's concession quotas for oil exports, taxes, foreign exchange reserves, non-oil revenues and the government's expenditure. After taking all these factors into account, the deutsche bank believes that six countries will have the worst resistance to the current low oil prices。
Their common weakness was that those countries could maintain a budget balance only if international oil prices remained above $100. Venezuela ranked first, with a price of $162 per barrel for oil, followed by iran, with a price of $140 per barrel. This was followed by $136 per barrel in bahrain, $126 per barrel in nigeria, and at a cost of $100 per barrel in oman and russia. Given russia's $400 billion foreign exchange reserves, it would be more resilient to low oil prices than the top five。
While these six countries are the most vulnerable to low oil prices, other opec members, led by saudi arabia, are not necessarily the last to laugh. In addition to kuwait's ability to hold on to the price of its oil reserves for a period of time at us$ 65 per barrel, the rest of the members, including saudi arabia, are not actually able to sustain oil prices near the current us$ 80 for the long term. In order to guarantee large government expenditures, saudi oil insurance prices were us$ 97 per barrel, while the average oil insurance prices of the opec member states were us$ 93. 3 per barrel. In order to win this “price war”, saudi arabia has two other weapons in its hands — foreign exchange reserves worth $750 billion, and a good financing environment for low public debt. “saudi resilience to low oil prices may last about two years, provided that international oil prices do not fall.” paul harson, head of research on bulk commodities at standard chartered bank。
Perhaps the best thing that saudi arabia would not want to see is that the final winner of the price war he launched could be another rival — the united states. According to a recent report issued by citibank, united states oil production growth is unsustainable only when international oil prices fall to $50 per barrel. Citibank noted in its report that even if international oil prices fell to $70, oil producers in the united states could still earn a profit, and that when oil prices fell to $50 or less, growth in shale oil production in the united states would be completely halted, and when oil prices fell near $40, producers would close their drills. But saudi arabia has not believed that the price of shale oil in the united states is so low. They have always believed that the cost of protecting shale oil should be around $90 per barrel. At the same time, goldman sachs acknowledged in its report that not all shale oil-producing areas could withstand the pressure of falling oil prices. For more expensive shale oil-producing areas, such as north dakota in the united states, production will be limited when oil prices are below $90. About 4 per cent of shale oil production in the united states is more expensive than this line. In canada, about a quarter of shale oil production costs more than $80 per barrel. “even if this time saudi arabia was unable to strike two powerful competitors at the same time, he would have wished to use this `price war' to find out where the price threshold that north american oil producers could afford.” according to edward morse, head of citibank's bulk commodity research。
While the resilience of oil producers to low oil prices varies widely, analysts generally believe that $80 per barrel of oil prices will be the red line of oil producers ' gains and losses. “each drop of oil in the world remains profitable near the $80 price.” in an interview with the british daily telegraph, iea’s chief economist, bÍrÓr, said: he therefore believed that international oil suppliers would not let oil prices fall below the red line。
On 22 october, international oil prices began to rebound, with a 0. 12 per cent increase in the price of the united states new york crude oil collection, which was $82. 81 per barrel, and a 1 per cent increase in the london brent crude oil to $86. 22 per barrel。
The saudi-initiated “barrel” of oil prices at $80 per barrel has already sounded, and it is now up to who “blinks” first。
Responsible editor: zhang dei
