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.

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.

LONDON — Oil headed for the biggest annual decline since the 2008 global financial crisis as U.S. producers and the Organization of Petroleum Exporting Countries ceded no ground in their battle for market share amid a supply glut.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. U.S. guidelines allowing overseas sales of ultralight oil without government approval may boost the country’s export capacity and “throw a monkey wrench” into Saudi Arabia’s plan to curb American output, according to Citigroup Inc. 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.

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. 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. 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.

His firm oversees about $120 billion. “It will take time to work off this huge supply glut.” Saudi Arabia trimmed output by 150,000 barrels a day to average 9.5 million this month, the biggest decline. 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 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. 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. Inevitably, the decision by Opec to “roll over” the existing 30 million barrel a day production quota at its November meeting revived old debates about its relevance and importance in the market, especially in light of the growth in US tight oil, or shale output.

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. 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. 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. 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.

The 12-member group produced 30.56 million a day in November, exceeding its collective target for a sixth straight month, a separate Bloomberg survey of companies, producers and analysts shows. 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.

According to our analysis, more than a third of global oil production is uneconomic (although these will not necessarily be shut in) at today’s prices and more than 2 million barrels per day of new projects are at risk. 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. 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 economy, which relies on crude sales for almost half its budget, may shrink as much as 4.7 percent next year if oil averages $60 a barrel, according to the central bank.

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. In China, a factory gauge for December fell to a seven- month low Wednesday, adding to signs of slowing growth in the world’s second-biggest oil consumer. 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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