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 US$4.64 to a 4 1/2 year low of US$69.05 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 enthused. Venezuelan Foreign 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 best seller 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. Then 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 by OPEC on the table.
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, Mr. Katusa said.
Washington would have supported the Saudi move as the U.S. oil sector accounts for less than 2% of GDP, but decreases in 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.'
Energy stocks on the TSX slid the most since 2011 today as oil prices plummeted following OPEC's refusal to cut output. Here are the big losers
Indeed, marginal shale producers in the U.S. midwest who depend on cheap money and US$100 per barrel oil for growth are likely to face an uphill battle, although fears of a seismic impact on U.S. impact are probably overblown.
While expectations were low that the group would actually 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 Index was down 6.94% Thursday. Shares at Suncor Energy Inc. slid 5.84%, Canadian Natural Resources Ltd. fell 7.20% and Imperial Oil Ltd. shares lost 7.24% in value in Toronto Stock Exchange tading. Talisman Energy Inc. shed nearly 14%. U.S. markets were closed due to the Thanksgiving holiday.
RBC Dominion Securities Inc. believes major Canadian oil sands companies such as Suncor, Cenovus Energy Inc., Canadian Oil Sands, Husky Energy Inc., Encana and Talisman can manage WTI at $60 per barrel.
'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.'
Canadian oil sands companies are less leveraged than their U.S. counterparts, but they will face a revaluation of their share prices over the next year as dividends come under pressure, Mr. Katusa notes.
While there will be discomfort for major global producers, in the great game of geopolitics, OPEC's status quo weakens Saudi Arabia's arch nemesis Iran, which is hoping to rid itself of international sanctions and reverse its crude oil production decline.
Tehran's negotiations with global powers regarding its nuclear program were extended by six months on Monday. Riyadh fears that a nuclear deal with global powers will strengthen Tehran at a time the two countries are battling for influence over the troubled Middle East region.
Still, Thursday's decision to hold production is not a knock-out punch to either U.S. shale producers, Iranians or the Russians.
'Russian production can sustain at US$65, even if it reduces government revenues. Russia has a $400-billion surplus,' said Mr. Katusa.
Mr. Pugh said the upshot is that OPEC appears resigned to making the best of a bad job, at least for the time being.
'Of course, the cartel can call an extraordinary meeting at any time if it feels that prices have fallen too far,' he said. 'But it is not clear that the outcome of any such meeting, before the next scheduled event in June, would be very different to this one.'
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