The major news story breaking in the oil space today is the passing of Saudi Arabia’s King Abdullah and the succession to the throne of King Salman bin Abdulaziz Al Saud. This comes at a time when oil prices have fallen over 60 percent since June 2014, aided substantially by OPEC’s decision in November not to cut crude oil production. In recent months, the rhetoric from Saudi Arabia’s oil minister Ali Al-Naimi has been that the Kingdom, home to more than a fifth of the world’s crude oil, would not intervene and instead allow the markets to decide the price of oil. However, traditionally, incoming kings have opted to appoint new ministers to key ministries such as oil and finance. While Al-Naimi has expressed his desire to retire soon, this is not expected until sometime after the June meeting of OPEC, a key catalyst for oil price recovery in 2015.
At present, the Saudi budget, which depends on petroleum exports for 85 percent of its annual revenues, balances at around $63 a barrel. This may partly explain Saudi Armaco’s latest decision to diversify its operations by, “investing big in gas,” at a field near Jordan according to its Chief Executive Officer Khalid Al-Falih. With oil prices hovering around $46 this morning and many predicting a prolonged period of depressed prices, Saudi Arabia will be forced to dip into its $800 billion dollar cash reserves to handle the largest deficit in its history of $38.6 billion. These domestic, fiscal problems, the oil price situation, coupled with regional conflicts and even minor ISIS incursions on the Saudi Arabian border all signal a baptism of fire for Saudi Arabia’s new King Salman.
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Meanwhile, two fellow OPEC members are facing their own unique set of challenges. Firstly, Iraq has reportedly lost around 50 percent of its revenues from oil exports and has consequently had to boost output to record levels just to stay afloat, according to Bloomberg. This move saw OPEC’s overall output rise by 80,000 barrels a day last month reaching a total of 30.48 million, with the drop off in Libyan supply being covered by Iraq and then some. While some stability has returned to Iraq following a deal with the Kurdistan Regional Government, according to Iraqi Prime Minister Haidar al-Abadi, the loss of oil revenues greatly impedes the fight against ISIS and threatens the Iraqi oil industry’s long-term survival and ability to maintain capacity at such high levels.
Secondly, amid allegations of illegally falsifying Iranian exports as Iraqi by switching ship cargoes off the coast of the United Arab Emirates, Iran is also facing further pressure on its exports from one key trading partner: India. Ahead of President Obama’s visit to India on January 25th, India’s government has asked refiners to cut import numbers from Iran for the next two months in order to maintain year-on-year levels in adherence to the sanctions imposed against Iran by the U.S. Given that India is Iran’s second largest buyer of crude oil, and with oil prices stubbornly low, the timing could not be worse as Iran tries to play nice with the West ahead of further talks regarding the development of its civilian nuclear program.
In addition to the tumultuous times facing its Middle Eastern OPEC counterparts, Venezuela is feeling the oil price pressure more than most. Last week, the price of Venezuelan crude dropped by almost 7.7 percent to $39.19 per barrel, spurring a 180 by President Nicolas Maduro in his policy regarding domestic fuel prices, which are currently the cheapest in the world, with gasoline at just $0.02 per liter and diesel at $0.01 per liter. As oil revenues reached six year lows, President Maduro asked lawmakers to consider ending the 18-year gasoline price freeze as the Venezuelan economy veers ever-closer to recession and default. As is an OPEC tradition, the Venezuelan president blamed “destructive” U.S. shale operations for flooding the market and driving down the price of crude oil worldwide.
Finally, the very nature of the oil industry and where it is headed in the near future has been the topic of closed-door discussions in Davos this week between leaders of some of the world’s largest oil companies including BP, Total SA, Royal Dutch Shell, Statoil, Chevron as well as some of the major state-run companies such as Mexico’s Pemex, China’s Sinopec and Saudi Arabia’s Aramco. Khalid Falih of Aramco said the discussions concerned the relationships with both oilfield services companies and engineering firms in a new oil price environment. As the costs of over 100 major projects ran over by a cumulative total of $400 billion and major oil companies have begun slashing capex and jobs worldwide, it is unsurprising that a revision of these key relationships with a view to further cutting costs has become a major talking point. Strategies being considered are: a shared database of the best and worst service companies listed by region, implementing a series of common standards for equipment such as valves and pipes, or even moving services and engineering work in house once again. So far 2015 is proving to be a year of major changes and January hasn’t even finished yet.
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By Evan Kelly of Oilprice.com