Rows of pump jacks stand out against the snowy landscape amidst flurries southeast of Waskada, a small town in southwestern Manitoba.Tim Smith/The Globe and Mail
Global oil producers could face a bleak winter unless OPEC heavyweights reverse course as they head into a critical meeting and reach an agreement on production cuts to boost sagging prices.
Ministers from Saudi Arabia and the United Arab Emirates signalled Wednesday that there would be no deal reached in Vienna, although the cartel's leaders may have been employing scare tactics in order to persuade fiscally-strapped members that they must participate in production cuts or face steep price declines.
Saudi Oil Minister Ali al-Naimi said Wednesday that he expects the oil market "to stabilize itself," leading to speculation that the Organization of Petroleum Exporting Countries will be unable to implement a substantial production cut. UAE Energy Minister Suhail bin Mohammed al-Mazroui echoed the Saudi view, telling Reuters that "the market will fix itself ultimately."
Crude prices – which are down 30 per cent since June – fell further in trading on Wednesday, with North America's West Texas Intermediate down 53 cents at $73.56 (U.S.) a barrel and North Sea Brent off 68 cents to $77.65.
With the hands-off attitude, Saudi Arabia and its allies appear content to see prices plunge further in order to flush from the market some of the highest-cost producers while stimulating global demand. Several analysts have said that, in the absence of significant production cuts by OPEC, prices could plunge below $70 a barrel and stay there for months.
"If they don't cut, it's going to take a very lower price" for the market to stabilize itself, Ed Morse, head of commodities research at New York-based Citigroup Inc., said in an interview. "The issue will be: Who feels the pain first. Is it the U.S. and its production basins and Canada and its production basin, or is it OPEC countries whose revenue is already suffering and will suffer more?"
Mr. Morse said he expects prices to plunge well below $70 in the absence of an OPEC production-cutting deal, as hedge funds and other commodity investors tend to overshoot changing market fundamentals, both in driving prices higher and in sending them lower than supply and demand conditions would warrant.
The Saudis appear determined to protect their market share in the United States where surging shale oil production is forcing imports out of the market. They also want to ensure that if there is a production cut, other OPEC members and non-OPEC producers share the pain. In particular, African producers, such as Nigeria, Angola and Algeria, produce the grade of light oil that is in oversupply and would be expected to reduce their production.
Analysts at the French Bank Société Générale SA said this week that break-even costs at three of the largest shale oil deposits in the United States – the Bakken, the Eagle Ford and the Permian – are about $65 (U.S.) a barrel.
Bank of Nova Scotia economist Patricia Mohr said oil sands production would continue to grow even with low prices as companies are locked into current expansion projects. However, future investment could be jeopardized if prices remain too low for too long.
"The Alberta oils sands are actually fairly cost competitive" compared with other North American producers, Ms. Mohr said.
Société Générale attached a 60-per-cent chance that OPEC would implement a production cut of about one million barrels a day. But the premeeting hints from various OPEC countries suggests that figure might be ambitious.
Russia, which is not a member of OPEC but is responsible for 11 per cent of global oil production, strongly hinted that it would not partake in any production cuts. Igor Sechin, Russia's former deputy prime minister who is the head of OAO Rosneft, Russia's top oil producer, told Bloomberg TV that the country's output would not be cut even if the price were to fall to $60.
Speaking in Vienna on Wednesday, Iranian Oil Minister Bijan Zangeneh said that some OPEC countries, but not Iran itself, were spoiling for a market-share war and that non-OPEC countries such as Russia needed to support any OPEC-led production cuts.
"Some OPEC members believe that this is the time where we need to defend market share," he told reporters. "All the experts in the market believe we have oversupply in the market and next year we will have more oversupply."
Eric Reguly