A plunge in world oil prices is forcing the producing countries of the Middle East, former Soviet Union and North America to rethink forecasts for output and what that might mean for their economies. The drop has suddenly brought into sharp focus an increasingly intense high-stakes battle for market share in an energy world that has gone from scarcity to abundance in less than a decade.
Saudi Arabia, along with Kuwait and United Arab Emirates, will oppose any moves within the Organization of the Petroleum Exporting Countries to hold back production, even if they would help prop up prices, the Wall Street Journal reported on Thursday, quoting a Gulf OPEC official. The 12-country cartel is due to meet next on Nov. 27.
Saudi Arabia, OPEC's most influential player, and its fellow producers have watched market share erode as a revolution in oil from shale formations has allowed the United States to sharply reduce imports. In September, their combined production hit a 13-month high amid weaker-than-expected demand in Europe and Asia, causing a glut that has put pressure on prices, according to the International Energy Agency.
Saudi Arabia's production rose slightly to 9.73 million barrels a day. Its officials have long told nervous markets that the country is comfortable with Brent crude between $90 and $110 (U.S.) a barrel, though it has never promised to defend the range, according to FirstEnergy Capital Corp. analyst Martin King.
It has been resolute in defending its franchise, especially in Asia, where it reduced its official selling prices to customers. Market share is crucial to Saudi Arabia as it in the midst of a spending spree at home to improve living standards and diversify its economy, according to The Economist.
Iran, tied for third in OPEC production capacity, has struggled with weaker Asian demand. That and skidding prices put it in a precarious economic position, as it requires oil at nearly $140 a barrel to erase its budget deficit. Crude has not come close to that price since months before the financial crisis took hold in 2008.
Mr. King has projected that Brent crude could bottom out in the high-$70s a barrel if the OPEC members move toward co-ordinating to reduce supplies and the high-$60s by year-end if they do not.
It is the world's third-largest oil producer behind Saudi Arabia and the United States, and revenue from its crude exports has fuelled President Vladimir Putin's increasingly militaristic ambitions along its borders. So far, the fall in crude prices has not blunted them, despite worsening damage to the economy.
Russia derived half its federal budget revenue from mineral extraction taxes and export customs duties on oil and gas in 2013, according to the U.S. Energy Information Administration. That makes its economy highly sensitive to movements in crude markets. Global benchmark Brent oil, which sold on Thursday for $85.02 a barrel, has lost about a quarter of its value since the start of the year.
The country requires oil prices of $100 a barrel to balance its budget, according to The Economist.
Russia has flirted in years past with acting in concert with OPEC to take production off the market to rescue prices, but has shown no signs of doing so intentionally this time, even as global demand slows.
However, third-quarter production slipped from a year earlier, the first time that had occurred since the financial crisis nearly six years earlier, according to the IEA's October Oil Market Report.
In mid-September, the United States and European Union announced their latest round of sanctions against Russia, prohibiting U.S. and European companies from providing goods and services to Russian deep-water, Arctic or shale projects.
The IEA predicted that the sanctions would have minimal impact on short-term production, but will hamper the country's ability to offset declining output from older oil fields. As a result production is expected to average 10.9 million barrels a day in 2015, which would be down from this year's estimated volume.
A renaissance in oil production in the United States has brought dramatic change to the global oil movements. Output has surged to 8.5 million barrels a day from five million in 2006, and the U.S. Energy Information Administration has predicted output of 9.5 million next year. At the same time, imports have dwindled to 7.6 million (b/d) from 10.1 million. Canada is the only foreign supplier to have boosted U.S. market share.
As much as 70 per cent of the annual U.S. output gains come from three major shale deposits – the Bakken in North Dakota and the Eagle Ford and Permian in Texas, according to Manuj Nikhanj, managing director at ITG Investment Research.
The plays require active horizontal drilling and hydraulic fracturing, or fracking, operations to keep the oil flowing, with well costs running between $6-million (U.S) and $12-million each. Break-even oil prices for most of the major shale fields are between $60 and $70 a barrel, Mr. Nikhanj said.
It is doubtful crude prices in the current range will force producers to curtail operations, though reduced cash flow may prompt them to trim capital spending, especially as shaky capital markets make it tougher for companies to raise extra money by issuing shares or debt. The eventual result could be a slightly flatter profile for overall production gains.
In Canada, the Alberta oil sands have generated the bulk of new production. In recent years, developers expanded multibillion-dollar projects as congested pipelines backed supplies up within the province, at times leading to deeply discounted prices. Currently, that discount is unusually narrow. That, and the weaker Canadian dollar, have combined to keep realized prices for domestic heavy oil relatively steady in comparison with world prices. According to BMO Nesbitt Burns, it takes oil at $90 a barrel, on average, to develop and operate oil sands mines profitably, though well-established projects can run at much lower prices. All-in costs for steam-driven projects, which comprise most new developments, average $65 a barrel.