What’s been shoring up oil prices: flimsy Saudi and Iranian words
If being fooled twice puts the shame on me, what does it mean for oil traders to be fooled infinitely by OPEC?
For the second time this year, OPEC oil ministers played oil markets like a fiddle. When oil prices dropped to $43.81 for Brent crude due to excess production and weak demand on July 25, the oil ministers started yammering about a deal to freeze production that would be sealed in Algiers, Algeria, this week.
The more they talked, the higher prices rose, and Brent, the international benchmark, eventually hit $51.04 on Aug. 15, dragging West Texas Intermediate, the U.S. benchmark, along with it to $49.67. But alas, it was not to be.
“I don’t expect that an agreement will come out of the consultations tomorrow,” Saudi Energy Minister Khalid al-Falih told reporters Tuesday in Algiers.
Completely predictably, Saudi Arabia and Iran failed to agree on what levels to freeze production, sending the price of oil back to reality. Brent closed at $45.94 on Tuesday, and WTI ended the day at $44.67.
Look for more losses in the days and weeks to come.
That’s bad news for Houstonbased energy companies hoping that a freeze would have pushed prices closer to the U.S. breakeven point of $60 a barrel. While some wells are profitable for less than that, a recent survey by financial services firm Deloitte found that most oil company executives say $60 or more is necessary to spur new exploration and production in the U.S.
Many observers will try to blame Iran for the failure to freeze. But Iranian Oil Minister Bijan Namdar Zanganeh has made it clear for months that his country is committed to producing 4 million barrels a day now that international sanctions are lifted. Every OPEC member knew that going into Algiers.
The real culprit here is Saudi Arabia. The kingdom has been breaking records for oil produc-
" tion ever since the price collapsed in mid-2014, reaching 10.6 million barrels per day in August, according to official data. Saudi Arabia’s break-even price is about $10 a barrel, though it needs $60 a barrel to cover the cost of social programs. Before the price collapse, Saudi produced 9.6 million barrels per day.
Saudi officials allowed the oil price to drop after the kingdom began losing market share to highercost producers, and U.S. companies took advantage of $100-a-barrel prices to finance the high cost of horizontal drilling and hydraulically fracturing shale rock.
Former Saudi Oil Minister Ali al-Naimi said in 2014 that OPEC would allow the global market to set oil prices, with the lowest-cost producers selling all that they want ahead of high-cost producers. Price slid to $29 a barrel in February.
King Salman’s new administration reversed decades of internal policy and boosted oil production as prices dropped, forcing other nations to make cuts. Deputy Crown Prince Mohammed bin Salman has rolled out plans to move the Saudi economy away from reliance on oil profits, and the oil ministry is selling oil as fast it can pump to raise capital to make the necessary investments.
Saudi’s escalation coincided with Iran’s return to the oil markets following nine years of declining production under international sanctions. Saudi kings have long considered Iran a regional rival, and keeping prices low by pumping more oil denies Iran the foreign income and market share it so desperately wants, and demands.
Saudi Arabia, a majority Sunni country, is angry with Iran over moral support for Shiite rebels in Yemen and efforts to increase influence in Iraq. Flooding the world with oil is war by another means.
On Monday, Saudi officials said they would cut production if Iran agreed to a cap at its current output of 3.6 million barrels per day, far short of Iran’s goals. Zanganeh told Bloomberg News on Tuesday that a production freeze was “not on our agenda.”
No freeze means the world will produce about 400,000 barrels more oil than it needs every day in the last three months of 2016, according to a Goldman Sachs analysis first reported Tuesday by the Wall Street Journal. The investment bank also predicted that increased efficiency in U.S. oil fields will lead to an additional 600,000 barrels of oil produced a day in 2017.
Goldman’s end-of-year price target for Brent crude is now $43, down from $50.
“The oil market is so volatile that I think an immediate balance is unlikely and would only be short-lived — maybe a few months — even if OPEC freezes production,” said Ed Baddour, president at Argo Consulting. “For now, I expect prices to stay at the current level for a while or even go down again in the near future, partly due to the weaker dollar.”
That major intervention is not forthcoming, no matter how many prayers Texas oil men and women offer. The Saudi-Iranian competition shows no signs of ending, and until it does end, there will be no deal.
The next time a Venezuelan, Algerian or Nigerian energy minister promises that a deal is just around the corner, that’s just desperate government officials trying to talk up the market.
Chris Tomlinson is the Chronicle’s business columnist. His commentary appears on Sundays and Wednesdays. He also posts a daily news analysis at HoustonChronicle.com/Boardroom.chris.tomlinson@chron.com twitter.com/cltomlinson