Tuesday, July 10, 2012

"The political perils of low oil prices"

As Grandmother used to say, "It's one tham ding or another".
From European Energy Review:
Oil prices have rapidly dropped in recent months, and some analysts predict a further (steep) decline. This might seem like good news to consumer states, but there is a catch. Whereas producer states could balance their budgets at $30 a barrel less than ten years ago, they now need $100 a barrel to make ends meet. If oil prices continue to correct, expect instability to hit producer states across the board. That might (ironically) help to set a price floor and push prices up again, but it's not a development that consumer countries should be happy about. Keeping oil prices at $100/b remains a better plan than seeing producer states collapse.

A not so silent war is being waged in the oil world right now. Prices have tumbled 31% since March which means someone needs to set a price floor, and do so fast. Most OPEC states had hoped that was going to happen when the cartel recently met in Vienna. But official quota levels were kept at 30 million barrels per day (mb/d), with the implicit agreement that once delegates flew out of Schwechat Airport, Saudi Arabia would start closing the taps to bring OPEC's non-official 31.8 mb/d production in line with the formal target. Saudi swing, Riyadh ropes.

Fair enough, but what everyone wanted to know, and especially Iran, Venezuela, and Algeria, was how far and how fast Saudi was going to make cuts and 'balance' the market. With Brent prices regularly dipping well below $100 and WTI prices considerably lower, OPEC hawks are getting very nervous. Non-OPEC producers in Russia and Central Asia even more so. Assuming demand side dynamics don't drastically pick up in Asia, we can expect three things to sequentially happen.
  • The first is an international price war across all producer states to force Saudi Arabia to take assertive action to tighten the taps and raise prices. That will be a difficult process given Riyadh has its own strategic objectives to want a sustained period of moderate prices, well below $100/b.