Oil-Price Poker: Why the Saudis Won’t Fold ‘Em
Don’t underestimate the impact of Middle East politics
ENLARGE
By
Updated Jan. 31, 2016 3:18 p.m. ET
SPENCER JAKAB
The
game being played in the global oil market today bears more than a
passing resemblance to poker. Nobody wants to quit while they’re losing.
That is important for investors to keep in mind as they ponder what have become almost daily spikes and drops in the price of crude. So, too, is the role of Saudi Arabia in the game.
It
remains within Saudi Arabia’s ability to foster at least a partial
recovery in crude prices on its own. A sharp rally in prices last
Thursday morning was based on comments from Russia’s energy minister
that the Saudis might get the ball rolling on 5% output cuts. That was
quickly refuted and oil gave up much of the gains.
All
major producers are suffering financially at today’s low prices—while
oil has bounced from its sub-$30 nadir of January, it is still down
nearly 7% in 2016 and nearly 70% from its 2014 peak. And Saudi Arabia
hasn’t forfeited only a couple of hundred billion dollars and counting
in forgone revenue, but also market share.
That has mainly been to a relative newcomer, U.S. shale producers. But going forward it may be to an old adversary: Iran.
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A Russian drilling site. Although Russia is pumping more crude than ever, Saudi Arabia still has the upper hand.PHOTO: BLOOMBERG
The Shiite powerhouse is ramping up production following
the lifting of nuclear sanctions. And its export surge is occurring
against the backdrop of ongoing proxy wars in Syria and Yemen. Those
make it difficult for Sunni champion Saudi Arabia to take the lead with
output cuts.
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Russia,
meanwhile, is pumping the most crude ever, hitting a post-Soviet Union
peak. But it may have difficulty maintaining today’s pace given a lack
of investment in its aging Siberian fields. The chief executive of
Russian oil giant Lukoil predicted that Russian output would drop in 2016 for the first time in several years.
And
then there is the additional wrinkle that Russia is actively on Iran’s
side in Syria. For those reasons, not only have occasional statements
from Russia about nonexistent agreements been something of a bluff, so
too might be the country’s willingness to voluntarily curb its own
output.
In other words, Russia is holding weak cards and the Saudis know it.
That doesn’t necessarily leave the game at a permanent impasse, though.
The
newest players at the table are U.S. shale producers. They helped the
U.S. to increase output by 80% between 2008 and 2014 and have the
shortest stack of chips at the table.
Unlike
governments, there is no OPEC of shale to coordinate output or absorb
losses. Instead, there are loans to service and shareholders to placate.
Shale
output will keep shriveling at today’s prices as companies slash
spending and many go bust. On top of that, tens of billions of dollars
in deferred capital expenditure from private companies on conventional
oil projects soon will begin to affect output.
Private
oil companies’ pain can help balance the market, but that will take
time. Russian overtures that include political and military concessions
might break the logjam and persuade the Saudis to take the lead on
production cuts.
For
now, politics, if not economics, suggests the Saudis will remain
all-in. That alone could keep a lid on an immediate oil-price recovery.
http://www.wsj.com/articles/oil-price-poker-why-the-saudis-wont-fold-em-1454270904?mo
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