A gas flare burns at an oil well site near Sidney, Montana, US (file). The number of rigs drilling for oil in the US dropped by 37 last week to 1,019, the fewest since July 2011, data from Baker Hughes showed on February 20. Since December 5, a total of 556 have been taken out of service.
Bloomberg/London/Dubai
Three months after Saudi Arabia made clear it was going to let oil prices keep tumbling, the strategy is showing signs of working.
US drillers are idling rigs at a record pace, gutting investment plans and laying off thousands of workers.
Those steps highlight how the Saudi-led Opec decision on November 27 to maintain output levels and protect its market share is having the desired effect - pushing prices down so far that they threaten to curb output in the US and other non-Opec countries.
Opec (Organisation of Petroleum Exporting Countries) leader Saudi Arabia will maintain that tack when the group next meets in June, according to some of the world’s biggest banks.
“Opec giving up on trying to control the price is working,” Francisco Blanch, head of commodities research at Bank of America Corp in New York said by phone. “It is having the effect that we would expect, which is a decline in investment and ultimately supply, and somewhat higher demand. We think this change is for good.”
The number of rigs drilling for oil in the US dropped by 37 last week to 1,019, the fewest since July 2011, data from Baker Hughes showed on February 20. Since December 5, a total of 556 have been taken out of service. Oil explorers including Royal Dutch Shell and Chevron Corp have announced spending cuts of almost $50bn since November 1.
Transocean Ltd, the world’s largest offshore driller, had its credit rating cut to junk on Wednesday by Moody’s Investor Service on concern the company will increase debt levels while the drilling market deteriorates. It has about $9bn of borrowings.
Oil has rebounded 12% in New York since January 29, following a drop of more than 50% from June, in part because of the decline in drilling, which signalled supply growth will slow. Lower prices also spurred demand from bargain hunters, putting European benchmark Brent crude on track for its first monthly gain since June.
US benchmark West Texas Intermediate for April delivery gained $1.59 to $49.76 a barrel on the New York Mercantile Exchange. Brent added $2.53 to $62.58 on the ICE Futures Europe exchange in London.
Demand is growing and markets are “calm,” Saudi Arabian Oil Minister Ali al-Naimi said on Wednesday in the Red Sea city of Jazan in the nation’s southwest.
US oil production will cease its month-on-month growth in April because of the drop in the rig count, Marios Maratheftis, the Dubai-based global head of research for Standard Chartered Plc, said in Dubai last Monday.
The US Energy Information Administration reduced its 2015 US crude production forecast to 9.3mn bpd in February from 9.42mn in November. The EIA projects output will fall in the third quarter for the first time in four years.
“Opec’s long-game strategy is on track,” Harry Tchilinguirian, head of commodity markets strategy at BNP Paribas SA in London, said by e-mail. “It’s suffering short- term financial pain for long-term gain.”
There is a cost to Opec, of course.
Oil’s plunge will reduce the group’s revenue by about 37% this year, according to the US Energy Information Administration. Export revenues for 11 of Opec’s 12 members, excluding Iran, will shrink to $446bn in 2015 from $703bn in 2014, the EIA estimates.
Saudi Arabia’s government said on December 25 that it expects a budget deficit in 2015 of 145bn riyals ($38.7bn), up from 54bn in 2014.
The Saudi strategy has been criticised by Venezuela, which the International Monetary Fund estimates will suffer an economic contraction of 7% this year, and Iran, which the IMF says will be deprived of $48bn of revenues over two years.
The Nigerian oil minister and current Opec president, Diezani Alison-Madueke, said she may convene an emergency meeting of the group, the Financial Times reported on February 23.
There’s no plan for such a gathering, according to a delegate who asked not to be named. Opec’s financially vulnerable members have little sway over policy because they’re unwilling to cut production, leaving decision-making power with Saudi Arabia, according to Mike Wittner, head of oil markets research at Societe Generale in New York.
Even having its own way, Saudi Arabia isn’t guaranteed success, according to Barclays. Global markets remain oversupplied, prices haven’t fallen enough to press Opec’s rivals into cutting sufficiently and increasingly efficient shale producers could restore output, said Miswin Mahesh, an analyst at Barclays in London.
“It’s still a very hard road,” said Mahesh. “We haven’t really seen an outright chunk of US shale or any other high- cost production falling.”
The US pumped 9.29mn bpd in the week ended February 20, the most in three decades, according to the EIA.
On the other hand, the International Energy Agency, a Paris-based adviser on energy policy to 29 developed nations, boosted its estimate of the world’s dependence on Opec in a February 10 report, citing lower forecasts for other nations. Opec will need to provide 600,000 bpd more in 2019 than the IEA predicted in its previous long-term outlook.
“If I’m sitting in Saudi Arabia, I’d say it looks like the plan is on its way to working,” Wittner said. “It does need to be reflected in real supply. But all the signs are pointing in the right direction.”
