OPEC December Crude Output Slips as Global Prices Tumble

31 Dec 2014 | Author: | No comments yet »

Falling oil prices: this time around, it will be different.

Oil’s slump has roiled markets from the Russian ruble to the Nigerian naira and squeezed government budgets in producing nations including Venezuela and Ecuador. OPEC oil output dropped less than 1 percent in December, the first month after the group refused to cut production in response to a rout in oil prices, a Bloomberg survey showed.

NEW YORK—Brent oil futures, the global benchmark, are down about 50% for the year as plentiful supplies and tepid demand have sent prices plunging since June. Output by the 12-member Organization of Petroleum Exporting Countries slipped 122,000 barrels a day, or 0.4 percent, to 30.239 million, led by declines in Saudi Arabia, Libya and the United Arab Emirates, according to the survey of oil companies, producers and analysts. OPEC has signaled it won’t cut supply to influence prices, instead preferring to defend market share amid an unprecedented U.S. shale boom. “The main reason for oil’s decline is OPEC sitting on the fence,” Giovanni Staunovo, an analyst at UBS AG in Zurich, said by e-mail. “To prevent an excessive inventory build-up, non- OPEC supply growth, particularly U.S. tight oil, needs to decelerate or stall temporarily.” President Barack Obama’s administration opened the door for expanded oil exports by clarifying that a lightly processed form of crude known as condensate can be sold outside the U.S. Earlier Wednesday, China’s factory data showed more sluggishness, with the final reading of the HSBC Manufacturing Purchasing Managers’ Index at 49.6 in December, down from 50 in November. The publication of guidelines by the Commerce Department’s Bureau of Industry and Security is the first public explanation of steps companies can take to avoid violating export laws.

OPEC left its production quotas unchanged at a Nov. 27 meeting in Vienna, prompting speculation that the group will let crude slide low enough to slow U.S. production that’s climbed to the highest level in three decades. “Ultimately the big producers will make significant cuts to support prices,” Dan Heckman, Kansas City, Missouri-based national investment consultant at U.S. Late Tuesday, the American Petroleum Institute said weekly total U.S. crude stockpiles rose by 760,000 barrels, and stockpiles at the Cushing, Oklahoma delivery point for Nymex WTI futures rose by 1.8 million barrels. “Given that crude stocks normally decline at this time of year, we’ll view the increase as moderately bearish if confirmed by the more definitive Department of Energy data due out at 10:30 a.m.

The 2014 sell-off originated in the oil market: first from rising inventories as demand weakened and unplanned outages eased; and then when Opec — effectively Saudi Arabia — decided not to intervene and let market forces rule. The U.S. oil boom has been driven by a combination of horizontal drilling and hydraulic fracturing, or fracking, which has unlocked supplies from shale formations including the Eagle Ford and Permian in Texas and the Bakken in North Dakota. On the New York Mercantile Exchange, light, sweet crude futures for delivery in February traded down $1.32, or 2.4%, to $52.80 a barrel, also on track for a five-year low.

One of the reasons Saudi Arabia relinquished its role as a swing producer is precisely because of these differences — in 2008, external factors caused the drop in demand, which Opec then took action to correct. Commerce Department Tuesday confirmed that it has granted more permissions to energy companies with ultralight oil export applications pending before the agency.

Asian demand for Saudi crude is weak, sources said. “For a long time OPEC, in particular the Saudis, has been the swing producer,” Adam Wise, who helps run a $6 billion oil and gas bond portfolio as a managing director at John Hancock in Boston, said by phone. “They would cut production when prices were heading too low. The shale boom in the U.S. has resulted in surging oil production in the world’s largest economy, giving stiff competition to other global oil producers, especially the Middle East.

Production cuts by Saudi Arabia to shore up prices would therefore only result in the kingdom losing market share given the inability and unwillingness (for various reasons such as lack of revenues or high social spending) of other Opec and non-Opec countries to reduce output. Saudi Arabia, which is leading OPEC to resist production cuts, has said it’s confident that prices will rebound as global economic growth boosts demand. The decision to not intervene is a brave one given that it signals a departure from what economic theory would suggest an oil producer should focus on — revenues.

Saudi Arabia is giving up billions of dollars of revenues in the short term and running a $39 billion budget deficit in 2015, in an effort to retain market share. Low supplies in Cushing earlier in the year were a key factor pushing Nymex oil prices above $100 a barrel. “We’ve steadily rebuilt those inventories” at Cushing, said Donald Morton, senior vice president at Herbert J. Indeed, Saudi Arabia’s oil minister has stated openly that irrespective of price levels “be it $40, $30 or $20 per barrel” they would not reduce output. He has since appointed Prince Muqrin bin Abdulaziz as second in line to the throne after Crown Prince Salman Venezuela’s President Nicolas Maduro vowed an economic “counter-offensive” to steer the OPEC nation out of recession as it struggled with the world’s fastest inflation.

For the industry, not only has the recent collapse broken a long period of high and stable oil prices, it has also been a huge wake up call especially in light of Saudi Arabia actively talking down the market, something which is unprecedented. Ecuador, which relies on crude for about a third of its revenue, may cut next year’s budget by as much as $1.5 billion and seek additional financing if prices don’t stabilize, the Finance Ministry has said. Commodity Futures Trading Commission. “But the balancing will take time, perhaps not before the middle of the second quarter of 2015,” he said. “The market will get worse before it gets better.” Gasoline futures for January delivery recently fell 2.46 cents, or 1.7%, to $1.4291 a gallon.

Oil’s collapse has also threatened to push Russia, the world’s second-largest crude exporter, into recession as its currency headed for its steepest annual slide since 1998. The central government reached a deal with its semi-autonomous Kurdish region early this month on oil exports through Turkey, paving the way for more shipments to international markets. Hedge funds and other large speculators cut net-long positions on WTI for the first time in four weeks, reducing their holdings by 5 percent through Dec. 23, U.S.

The Asian nation will account for about 11 percent of global demand in 2015, compared with 21 percent for the U.S., projections from the International Energy Agency in Paris show.

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