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It’s been quite a while since the cartel has sat idly by in the face of a collapse that knocked almost 40% off the price of oil, but that is exactly what happened at last week’s meeting in Vienna. It had been widely assumed that OPEC would need to cut output by between 1 and 1.5 million barrels per day to establish a floor under the price; some were hoping for it to ride to the rescue as it did in fashion at the 2009 lows — different price, different time.
Basically, Saudi Arabia has intimated that the first production cuts in support of the price are going to have to come from somewhere else — as in, the U.S. shale operators, and it will no longer shoulder the burden of adjustment alone (indeed, after a month in which U.S. shale production surged more than 3%).
The UAE’s oil minister, Suhail Al Mazroui, didn’t exactly mince words after the meeting: “There is oversupply, but this is not an OPEC problem,” with the hint being America’s role in pushing prices down to new four-year lows.
This is a serious change in the cartel’s reaction function and it would be dangerous to underestimate the repercussions of OPEC relinquishing its traditional role as the rebalancing mechanism for the oil market.
The leadership — in addition to the Saudis and the UAE, we are talking about Kuwait and Qatar — are low-cost producers with apparent massive “rainy day” funds and can clearly withstand a prolonged period of low prices in a bid to recapture lost output share down the road (Kuwait’s energy minister, Ali Saleh al-Omair, already uttered the words US$60 as a reference to a level that OPEC can gladly live with — the jury is out on whether this strategy will work because the outcome could be a more unstable oil market with a sharp price snapback at some point if investment and production rates recede as they did for about a quarter century following the 1986 price collapse).
For now, the trap door is open and a move to US$60 a barrel for WTI could well be the next stop. Some analysts are now moving in that direction.
Hung out to dry will be the highest-cost producers, and that means oilsands in Alberta, Arctic exploration, deep-water drilling in Brazil as well as the poorer OPEC members such as Venezuela (which needs US$117 per barrel to stabilize its fiscal situation), Nigeria and Iran. Russia and its ruble are huge losers in this as well (over 50% of government revenue is derived from oil receipts).
Mexico’s impact should be blunted in part from the sector reforms that have bolstered operational efficiencies in the country’s energy sector (plus the fact that the oil share of Mexican exports in the past two decades has also been sliced to 13% from 38%).
For the rest of this article, click here: http://business.financialpost.com/2014/12/05/david-rosenberg-why-the-bottom-falling-out-of-oil-isnt-all-bad/