OPEC move will keep oil prices low
Stable production rates also benefit American foreign policy
Saudi Arabia and its allies sacrificed a short-term boost to their coffers to weaken their rivals Iran and Russia. In the process they may also have delivered a Thanksgiving gift to the global economy.
The Organization of the Petroleum Exporting Countries (OPEC) decided Thursday to maintain production at 30 million barrels per day, sending both Brent and West Texas Intermediate benchmarks reeling to four-year lows. January crude contract was down $4.64 US to a 4½-year low of $69.05 US a barrel in electronic trading on the New York Mercantile Exchange late in the afternoon.
“It was a great decision,” a beaming Saudi oil minister Ali Al-Naimi told reporters after a marathon five-hour discussion during their meeting in Vienna.
Not all members were as enthusiastic. Venezuelan Foreign Affairs Minister Rafael Ramirez, who had pushed for a cut in production to boost prices, left the meeting “visibly angry,” as the barely contained hostility between OPEC members was evident once again.
“Effectively, there are two factions within OPEC,” said Marin Katusa, a Vancouver-based analyst at Casey Research and author of New York Times bestseller The Colder War — How the Global Energy Trade Slipped From America’s Grasp.
OPEC producers with spare capacity — led by Saudi Arabia, UAE, Kuwait and Qatar — enjoy fiscal surpluses, with billions stashed in international markets and sovereign wealth funds that can weather a sustained low-price environment.
Member rivals Iran, Algeria, Nigeria and Venezuela need high oil prices to fund their, often-dysfunctional economies. As usual, the Saudis, who account for about a third of OPEC production, bent the group to its will.
Memories of 2009 must also be fresh in the Saudis’ minds. That year, OPEC cut output by half a million barrels per day after an implicit deal with the Russians that they would do the same. In the end, Russia backed out and raised output, mopping up the revenues left on the table by OPEC.
The group’s latest inaction benefits U.S. foreign policy as it inflicts fiscal pain on Venezuela, Iran and Russia, even if it means revenue pressure for a segment of U.S. shale producers, Katusa said.
Washington would have support- ed the Saudi move as the U.S. oil sector accounts for less than two per cent of GDP, but falling gasoline prices keep U.S. drivers happy and provide a significant boost to the economy.
In a note titled “A Thanksgiving gift from OPEC in Vienna,” Citibank analyst Seth Kleinman wrote that “U.S. motorists will save on gasoline, but tensions may run high over turkey in North Dakota and parts of Texas.”
Indeed, marginal shale producers in the U.S. Midwest who depend on cheap money and $100-US-perbarrel oil for growth are likely to face an uphill battle, although fears of a seismic impact in the U.S. are probably overblown.
While expectations were low that the group would cut output, OPEC’s inaction nonetheless caused oil prices to slump. It’s proof to investors, wrote Tom Pugh, commodities analyst at London-based Capital Economics, that OPEC is either unable or unwilling to cut output to support prices.
The S&P/TSX Energy Capped In- dex was down 6.94 per cent Thursday. Shares at Suncor Energy Inc. slid 5.84 per cent, Canadian Natural Resources Ltd. fell 7.20 per cent and Imperial Oil Ltd. shares lost 7.24 per cent in value in Toronto Stock Exchange trading. Talisman Energy Inc. shed nearly 14 per cent. U.S. markets were closed due to the Thanksgiving holiday.
RBC Dominion Securities Inc. believes major Canadian oilsands companies such as Suncor, Cenovus Energy Inc., Canadian Oil Sands Inc., Husky Energy Inc., EnCana Corp. and Talisman Inc. can manage at $60 US per barrel of West Texas Intermediate.
“All issuers have adequate available liquidity with the exception of CNQ (Canadian Natural). At this price scenario, CNQ would likely scale back capital spending materially,” RBC’s Matthew Kolodzie in a note.
“SU (Suncor) can cover its shortfall with cash on hand without curtailing capex.”