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Frik Els

Frik Els

Frik Els is editor for MINING.com in Vancouver, BC. Frik has been writing on business for the past 15 years covering the resource industry, investment, autos,…

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Why Saudi Arabia Will Not Win The Oil Price War

Why Saudi Arabia Will Not Win The Oil Price War

Crude oil prices continued to surprise on Tuesday, with the U.S. benchmark adding another 4 percent to $44.60 a barrel. West Texas Intermediate is now up 65 percent since hitting 13-year lows below $27 a barrel February 11. It's a performance only bettered by the globe's second most traded bulk commodity – iron ore.

But like analysts of the steelmaking raw material, many in the industry have been surprised by the extent of the rally, consistently calling the oil price lower. The blame for the cloudy outlook for crude is mostly being laid at the door of Saudi-Arabia.

After the collapse of the Doha talks to freeze production and amid a spat with the U.S. over terrorism, the world's top producer has threatened a scorched earth policy when it comes to maintaining and growing its market share. Related: Can Oil Continue To Rally Like This?

But there is an alternative view out there that argues that the U.S., more than the Saudis, will control the direction of the market and in the event of an all-out price war holds the commanding position.

That's thanks to astonishing technological improvements in the U.S. The shale revolution that drove natural gas production between 2010 and 2015, found its way into the oil field, resulting in a 57 percent jump in U.S. crude production in just three short years to peak at 9.7 million barrels per day in April 2015.

(Click to enlarge)

Source: Platts Analytics NG Market Call Long Term, NGL Market Call, and Crude Oil Market Call

And it's not just a crude story: In the last decade, the U.S. has introduced 8.3 MMBoe/d (million barrels of energy equivalent per day) into the global market when one considers production of crude, natural gas and natural gas liquids according to research by Platts Analytics.
Suzanne Minter, Manager of Oil and Gas Consulting for Platts Analytics on Tuesday testified before the U.S. Senate Energy and Natural Resources Committee about where the global oil market is heading. Related: ExxonMobil Loses AAA Credit Rating For First Time Since 1930

Minter said "the time and the rate in which this energy entered the market appears to have stressed the system in ways unimagined" making the U.S. producer "the marginal supplier and price setter into the global market":

After 14 months of persistently low prices, U.S. producers have entered 2016 with estimated capital expenditures cuts of 40 percent, more than 6,500 drilled but uncompleted wells in inventory, and find themselves operating at or near cash costs.

"Drilled but uncompleted wells hold reserves that can be brought on line in a short period of time, thereby defining the concept of spare capacity. It is plausible to believe that U.S. spare capacity may be close to rivaling OPEC’s current spare capacity. However, we believe that the prices needed to incentivize the U.S. producer to complete their drilled but uncompleted wells may be much lower than global competitors believe or would like it to be.

"The near term oil recovery will be more than likely be tenuous and ebb and flow, rather than occur in a linear fashion, as all parties involved figure out how to balance supply growth. However, due to spare capacity and the unique economic environment which drives producer activity, it may very well be that the U.S. producer is best positioned to lead the recovery and bolster economic growth.” Related: Chesapeake Has Bought Itself Time But Can It Survive?

Platts Analytics research shows that Texas alone could introduce 1.25 MMB/d of oil into the global market and can do so in a short space of time – on average just 30 days. That's more oil than the Saudis have threatened to flood the market with and all very close to the world's top refining hub.

Over and above resources and technology, the U.S. has another powerful advantage: dynamic markets. The country has roughly 9,000 different entities producing energy. Saudi Arabia's oil wealth – indeed its whole economy – is now in the hands of a 30-year old prince.

Minter said that "while each producer will behave differently than the next, it seems realistic pricing in the mid-$40 – $50 per barrel range they will bring incremental volumes back into the market place. Well, that's where we got to today.


(Click to enlarge)

Source: Platts/Platts Analytics Oil Market Call April, 2016

By Frik Els via Mining.com

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  • Kr55 on April 27 2016 said:
    Just breaking even is not enough for producers drowning in debt. They have to borrow millions of dollars per well still to get new production going. Their hedging right now is just to get more money for existing production (almost all producers have very little hedging today for existing production) and they thank their lucky stars they can get a little more profit to pay their massive debts and hopefully they can save more when their long term debts some to maturity.

    Most producers will remain in defensive mode trying to repair their destroyed balance sheets by getting all they can from existing production until oil make a real recovery back in the 60's. Don't expect them to go too crazy adding production until then, most will just be happy with their declines being around 10% for the year.
  • Phil on April 27 2016 said:
    These DUC wells that you speak of are great and all but it's not as easy as flipping a switch to start producing them.

    One problem is going to be the costs associated with fracing these wells and putting them into production. This is the most expensive part of a land based operation. Drilling horizontal wells is cheap compared to the costs of completing them.

    The second major issue is even if they did want to spend all of this money on fracing and get 100's of wells producing in 30 days, who is going to do it? There just isn't enough people in the service industry to do it, so as demand increases, so will pricing and with that pricing increase, the $50 break even become $70 and we are right back to where we are today.

    There is not magic switch that is going to flood the market in the US, it just isn't going to happen.
  • Sadah on April 27 2016 said:
    Write whatever you want, but these guys already won. Why would they sabotage Doha unless they wanna make sure that all high cost producers phase out. It's working pretty well for then since ut cost them arounf $10 a barrel.
  • Jay on April 27 2016 said:
    First article I read where the first comments are 100% accurat, where people actually know what is going on, and do not have there head up there a s s like a majority of the comments u read about oil
  • Sal on April 28 2016 said:
    Can anyone point out a recent break-up of the various market demand segments for oil? Large utility-scale electricity generation is no longer going to be a major market segment for oil - with gas and renewables pushing it out of new capacity additions. So it seems to heavily rely on automotive transport. If China makes a big move towards electric vehicles, oil is in big trouble anyway.

    The biggest killer for the Saudi Arabian economy is China. They are the world's leader in both solar and wind installations. They have also shifted their oil imports to Russia. The US and Saudi Arabia have been politically aligned - to be more precise, their political elites are interconnected. But the shale gas industry in the US and Saudi Arabia's dependence on oil is in fundamental conflict. Saudi has not been able to diversify beyond oil - it simply makes bad investments and cannot manage new industrial infrastructure as well as it should. So all in all, doesn't look good for the Saudi economy.
  • PaulApp on April 28 2016 said:
    Saudis game of mouse is forcing smaller OPEC countries out of oil industry. While leaving the U.S. Shale, Iran, Russia, and Saudi Arabia thriving at $50 to $60 per barrel.
  • Mark on May 01 2016 said:
    This debate is hampered by a big unknown, the size of Saudi reserves which appears to be a state secret. There are many possible scenarios but there is currently a drilling frenzy in Saudi. It is possible this is an attempt to further flood the market but equally could be a response to decling production in mature fields such as Gharwar. It is possible that the young Crown Prince's liberalisation policy could be a response to decling reserves as predicted some 20 years ago.

    While on the subject of unknowns, I get the impression from some commentators that Chinese GDP statistics may fall into the "there's lies, dammed lies, and statistics" category. Anyway with a country the size of a continent, I guees it wouldn't be surprising if they were "guesstimates". So overall for the pupose of economic analysis, having two very important parameters so opaque must complicate the process of prediction.
  • Don Clifford on May 06 2016 said:
    Regardless of who the reserve supplier is, downward pressure on price seems to be semi-permanent. For every $10/brl increase, cash starved producers everywhere will be eager to sell.
  • Ashley Jacob on August 05 2016 said:
    Taking all the aforesaid into consideration, obviously Saudi Arabia won't ever win the oil price war as with oil prices stubbornly low Saudi Arabian future looks fraught
    Just now Saudi Arabia has started to lift oil pricing for Asian and US customers.
    And it's really an unmistakable sign that soon we'll see $100 oil again.

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