Saudi Oil Minister Ali al-Naimi
held talks with officials from Venezuela, Russia and Mexico in Vienna before Thursday's summit of the Opec.
Crude
prices have dropped roughly 30% since June, and some oil producers are
pressuring Opec to cut production. Tuesday's pre-summit meeting ended
with no sign of an accord, prompting prices to dive, Reuters reported.
A
Wall Street Journal report that Opec members were edging toward a
compromise aimed at adhering to previously agreed production limits
sparked a brief rebound before losses deepened.
Venezuelan Foreign
Minister Rafael Ramirez, pressing for some kind of deal to revive
tumbling oil prices, said the four nations at Tuesday's meeting agreed
that oil at below $80 was not good and that they would meet again in
three months.
"It's pretty clear from today's meeting that the
Saudis don't want a cut, and there's not going to be one," said John
Kilduff, partner at New York energy hedge fund Again Capital.
Predictions
for the Opec summit range from a large output cut to none at all, and
heavyweight Saudi Arabia has kept the market guessing what it will do.
Benchmark Brent crude settled down $1.35 at $78.33, falling from an intraday high of $80.44.
US
crude finished down $1.69 at $74.09. It fell as much as $2 in
post-settlement trade, reaching $73.78, near a four-year low of $73.25
hit a little more than a week ago.
"The market's all over the
place with the headlines we're getting today," said Tariq Zahir,
managing member of Tyche Capital Advisors in New York.
"The reality is
Opec needs a cut of no less than 2 million barrels per day to clear the
oversupply in the market, and they need to hold that down if they really
want to see prices recover."
Even with an agreement to lower output, compliance might be tough, traders said.
Oil Bust of 1986 Reminds U.S. Drillers of Price War Risks
By Asjylyn Loder
Nov 26
The last time that U.S. oil drillers
got caught up in a price war orchestrated by
Saudi Arabia, it
ended badly for the Americans.
In 1986, the Saudis opened the spigot and sparked a four-month, 67 percent plunge that left oil just above $10 a barrel.
The U.S. industry collapsed, triggering almost a quarter-century
of
production declines, and the Saudis regained their leading
role in the world’s oil market.
So while no one expects the Saudis to ramp up output now
like they did then and U.S. shale oil companies are pledging to
keep drilling regardless, the memory of that bust looms large
for American industry executives on the eve of OPEC’s meeting
tomorrow. As the Saudis gather with officials from the 11 other
OPEC nations in Vienna, analysts are split on whether the group
will cut output to lift prices or leave production unchanged to
fight for market share with shale drillers.
“1986 was the big price collapse and the industry did not
see it coming,” said
Michael Lynch, president of Strategic
Energy and Economic Research in Wakefield,
Massachusetts, who
has covered the oil sector for 37 years. “It put a lot of them
out of business. You just don’t forget it. It’s part of the
cultural memory.”
The Organization of Petroleum Exporting Countries,
responsible for about 40 percent of the world’s output, pumped
31 million barrels a day in October, exceeding its official
target of 30 million.
Declining Prices
West
Texas Intermediate, the U.S. benchmark contract, fell
to a four-year low of $74.09 yesterday on the
New York
Mercantile Exchange, down 31 percent from the 2014 peak in June.
Brent, the pricing standard for more than half of the world’s
crude, settled at $78.33 on London-based ICE Futures
Europe.
“Someone has to blink,” said
Sarah Emerson, managing
principal of ESAI Energy Inc., a consulting company in
Wakefield, Massachusetts.
“OPEC is saying ‘Does it really have
to be us?’”
Saudi Arabia wasn’t the first to blink in 1986. The kingdom
had been the world’s swing producer for years, boosting output
when prices rose and scaling back when they dropped. As fellow
OPEC members pumped more crude, the kingdom’s production fell to
3.175 million barrels a day in 1985 from more than 9 million in
1981, according to data compiled by Bloomberg. That left the
country facing a growing budget deficit, according to
Daniel
Yergin’s Pulitzer Prize-winning book The Prize.
Market Share
In December 1985, Saudi Arabia declared its intention to
regain market share and oil prices began to decline, sinking to
as low as $10.42 a barrel in March 1986 from a November 1985
peak of $31.72.
OPEC reached a new production-sharing agreement in December
1986. By then, the damage to U.S. producers had been done.
Unemployment in
Oklahoma rose to 8.9 percent and in Texas to 9.3
percent, compared with the 7 percent national average.
Production in Oklahoma fell 8.3 percent in 1986 and 7.1 percent
in Texas, according to the Energy Information Administration.
“There was just a flood of equipment on the market,” said
James Richie, cofounder of Kruse Energy & Equipment LLC in
Odessa, Texas. He has been auctioning oilfield gear for 32
years, and said he conducted 86 auctions that year, more than
double the typical number. “In 1986, that equipment was
bringing pennies on the dollar.”
The history helps explain why U.S. producers are blaming
Saudi Arabia and OPEC for falling prices now and that they say
are designed to push them out of business.
Shale Battle
“We’re in a battle with Saudi Arabia in regard to market
share versus U.S. shale oil,” Scott Sheffield, chairman and
chief executive officer of
Pioneer Natural Resources Co. (PXD), said
on a Nov. 5 earnings call.
“What we’re dealing with here is a renaissance that’s
going to be very long-lasting here in the U.S.,” said
Harold Hamm, chairman and CEO of
Continental (CLR) Resources Inc., in a Nov.
6 earnings call. “And we see OPEC worried about that.”
The Saudis don’t see it that way. Saudi Arabia is committed
to seeking a “stable” oil price and speculation of a battle
between crude producers “has no basis in reality” Saudi Oil
Minister
Ali Al-Naimi said at a conference in
Acapulco,
Mexico,
on Nov. 12.
The slump isn’t, regardless of what U.S. producers say, all
the fault of Saudi Arabia or OPEC. The group has boosted output
by more than 1 million barrels a day since June, led by gains
from Libya and
Iraq, according to a Bloomberg survey of
oil
companies, producers and analysts. The Saudis’ contribution was
an additional 80,000 barrels. U.S. producers, meanwhile, ramped
up output by 621,000 barrels.
Increased Supply
Taken together, the increases are more than enough to
supply the 1.1 million barrels a day of worldwide demand growth
the Paris-based
International Energy Agency has forecast for all
of next year.
The glut hasn’t stopped U.S. shale companies from drilling
new wells. Top producers including Devon Energy Corp.,
Continental and Pioneer are planning double-digit production
gains next year.
“The U.S. oil industry is blaming the Saudis for a problem
that was created here,” Emerson said. “It’s like a gold rush.
Everyone is trying to get as much out of the ground as fast as
possible.”
Whether this slump proves as calamitous as 1986 depends how
long it lasts. Many U.S. producers bought derivatives that
protect them against declining prices. That insurance has its
limits, and for some companies it will run out after the first
half of 2015.
Less Cash
Shrinking revenue will leave less cash to pour into the
ground, making some companies vulnerable to a credit crunch.
Much of the shale boom is sustained by borrowed money. Total
debt for 61 of the U.S.-listed companies in the Bloomberg
Intelligence North America Independent E&P Valuation Peers
reached $199 billion in the third quarter, up from $184 billion
a year ago, according to data compiled by Bloomberg.
“There’s no doubt that you’ll see a lot of people who are
vulnerable,
especially the smaller players who don’t have deep
pockets, and are already deep into other people’s pockets,”
Lynch said. “Some of them are already hurting.”
You originated the expression "four bagger", "five bagger" et
cetera. What's that mean exactly?
I've always been a great lover of baseball. I mean if you grew up in
Boston, you know that the last time we won the World Series, Babe Ruth pitched
for us. It was 1918. So it's been a long drought here. So I've always loved
baseball and the ten bagger is two home-runs and a double. It's you run around
a lot, so it's very exciting.
Posts
