By Nancy Yamaguchi
When Saudi Arabia recently announced that it was reducing its official selling price for crude oil to the United States, the market responded immediately. As of the time of this writing in late November 2014, spot crude prices are at their lowest levels in four years (just under $76/b for WTI and just under $80/b for Brent.) The OPEC meeting was just held on Nov. 27th, 2014. Analysts around the world have been watching every movement of every oil minister in every OPEC country, as well as the leaders of key producing countries such as Russia, Mexico, the United States and Canada. At the meeting, OPEC decided to maintain its production ceiling of 30 million barrels per day.
The announcement is interpreted as a signal that the members will not make any significant cuts in production to strengthen crude prices. Current production levels are approximately 300,000 bpd above the ceiling, but it is unclear who will reduce production by even that much. It is assumed that production would have to be cut by 1 to 1.5 mmbpd in order to truly strengthen prices, since output from the United States and Canada has grown so strongly. Therefore, a continued weakening of oil prices is likely.
There is intense focus on short-term market movements, yet the medium and long term movements also deserve consideration, since market supply has been growing while demand has been weak for several years. The market response is more than merely a drop in price. It signifies that many market participants are pondering the deeper meaning and the longer-term implications. Among OPEC members, who, if any, will reduce production? Will some expand output in efforts to balance government budgets?
In the past, Saudi Arabia has played the role of swing producer and moderator. How many times has Saudi restraint prevented oversupply and price weakness? Conversely, how many times has market tightness been eased by Saudi ability and willingness to use its spare production capacity? The recent Saudi price cut coupled with the OPEC decision not to lower the production ceiling may signify that Saudi Arabia has grown weary of its role as moderator. There are many good reasons to believe that Saudi Arabia intends now to restrain itself from its policy of restraint.
Saudi Arabia has massive oil reserves, extensive upstream and downstream infrastructure, strong international ties and a determined government. It is easy to see why it plays a major leadership role within OPEC and in the world oil market as a whole. Yet in some ways, it has lost ground, and the recent price drop may signal that Saudi Arabia intends to regain it, both upstream and downstream.
The Global Crude Balance
After oil prices spiked in 2008, the United States, and many other key consuming countries, toppled into a severe recession. According to the International Energy Agency, OECD oil demand fell by 3.9 mmbpd between 2007 and 2009. Demand has stagnated since then, and many forecasts anticipate a continual, gentle decline in OECD oil demand. European demand has slumped. The IEA forecasts that European demand will be 200 kbpd lower in 2014 than it was in 2013, and that it will decline by another 100 kbpd in 2015.
OECD supply, in contrast, is expanding because of the advances in shale oil development in the United States and the growth of production from oil sands in Canada. North American crude production has grown by approximately 4.3 mmbpd.
The Middle East has lost ground in relative terms as a global supplier. Figure 1 illustrates how OPEC crude exports have fallen as a percentage of global supply. Using BP’s data series, in the year 2000, OPEC crude exports accounted for 24.6% of global oil demand. By 2013, this share had fallen to 21.5%. By this measure, OPEC crude exports have lost relevance in the global market.
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Figure 2 shows Saudi Arabia’s crude exports by destination, as reported by OPEC. Crude exports were typically around 7 mmbpd during the 2004-2008 period before falling to 6.3 mmbpd in 2009 in response to the global economic downturn. Exports recovered, and they climbed above 7.5 mmbpd in 2012. However, exports remained flat in 2013, and some OPEC countries would like to change this.
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