What's ahead for the oil market, after the Saudi-led destruction of the Doha production agreement? Global crude prices crashed in the immediate aftermath of Sunday night's failed meeting, but some of those large losses were reversed on news of an oil workers' strike in Kuwait. Oil prices finally turned positive on Tuesday due to the Kuwait strike, but how long can oil hold on?
With the Doha agreement in tatters, major oil producers are racing to increase production before their rivals can. On the other side of the coin, unexpected drops in oil production in other nations are whittling away at the global oil surplus.
Threats Of Production Boosts
Increased production and threats of even higher output have pushed an expected end to the global oil glut to 2018. Here are the major culprits:
Saudi Arabia, not content with sucker punching the other attendees at Doha, announced that if anyone (read Iran) increased production, Saudi output could jump another million barrels a day with no problem. Deputy Crown Prince Mohammed bin Salman warned that Saudi Arabia could produce 20 million barrels a day (twice current levels) by increasing refinery capacity, but it saw no reason to do so at this time.
Russia has scoffed at Saudi Arabia's attempts to blame the failure of the Doha talks on Iran. Russian energy minister Alexandr Novak asked “How can Iran be the reason for the talks’ failure, when it wasn’t even here? We believe the presence of countries responsible for 75 percent of the world’s output here was sufficient.”
Responding to Riyadh's threats to increase production, Moscow said it could easily boost production by 100,000 barrels a day to 10.81 million a day. American energy analyst Maxim Nechaev said that Russia's cost of production is around $4 a barrel (thanks to a devalued ruble,) so can easily survive on oil prices low enough to strangle the competition.
Iran is struggling to increase oil exports back to 4 million barrels per day, the level prior to international sanctions over its nuclear program. Of course, Iran was never going to comply with Saudi demands to freeze production. Initially, it was thought it would take a year to return to that level of output, but recent information from Iranian and OPEC sources now say the goal may be reached as soon as June. Since there is an OPEC meeting scheduled for June 2, there may be a glimmer of hope for another round talks, including Iran this time.
The oilworkers' strike in Kuwait has ended, sending crude prices plummeting. The 1.3 million barrel a day shortfall caused by the strike had been negating the daily growth in the global oil glut. Lost in the hubbub over the strike were plans by Kuwait to begin offshore oil drilling off their coast. The emirate intends to leverage its low cost of extraction to undercut competitors. Plans are to increase production to heights not seen since the 1970s.
Iraq rushed to increase production to record levels before the Qatar talks, to have a higher baseline in case a production freeze was negotiated. The country is in desperate need of income to fight Daesh in the nation's west, and rebuild infrastructure destroyed in the US war against Saddam Hussein. This led some market watchers to expect Iraq to not attend talks in Doha.
Falling Output, Falling Economies
An article in the Wall Street Journal covered those oil producing nations that have been "pushed to the brink" by the Saudis' torpedoing of the oil talks in Doha. Angola, Azerbaijan, Ecuador, Iraq, Nigeria, and Venezuela have all appealed to the World Bank and IMF for help.
While falling output will eventually lift oil prices, will many of these governments survive to see it?
Venezuela is the first country many think of when hearing the phrase "economic collapse from low oil prices." Although Venezuela has the world's largest oil reserves, most of it is rated "extra heavy." Like Canadian tar sands oil, Venezuelan oil is more of a goo than a liquid. It requires expensive pre-refining before it can be exported.
However, the worn-out infrastructure to refine this oil breaks down (or explodes) with alarming frequency. The state-owned oil company, PDVSA, has been mismanaged for decades, as Chavez loyalists were hired in place of industry professionals. PDVSA's refineries are literally falling apart, due to the socialist government ignoring capital investment. Instead, the company was treated like a piggy bank for social programs. The combination of falling oil prices and falling production has led to empty government coffers and nationwide food shortages.
Mexico is also having problems of falling production from its state-owned oil company, Pemex. Pemex posted a $30 billion after-tax loss last year, which meant no money to replace aging oil fields. Estimates show Mexican oil production falling by 100,000 barrels a day.
Instead of letting the petroleum sector collapse as Venezuela has, the Mexican government recently passed a law that allows private Mexican and foreign firms to partner with Pemex on exploration and refining projects. The infusion of capital and know-how is expected to start boosting oil production in the near future.
Nigeria is facing production problems through no fault of its own. Ex-rebels in the oil-rich Niger Delta region have taken up arms and are blowing up oil pipelines. This is a reaction to the government cutting subsidies (bribes) to ex-rebel commanders to "guard" the pipelines, due to falling oil prices. One rebel attack on a pipeline owned by Royal Dutch Shell resulted in 250,000 barrels of oil a day unable to reach its destination. The nation is also facing rampant oil thefts. People are cutting into the pipelines to steal oil. The problem is so bad, that when the Nigerian government touted a 32% reduction in pipeline oil thefts, 25,000 barrels a DAY were still being stolen.
A Post-Doha World
Things really didn't change in the global oil outlook after Doha, except for some naive speculators getting burned. The large guys will continue to pump as fast as possible, to make up for low oil prices through volume. Those nations who neglected proper investment into their domestic oil industry will continue to struggle (in some cases, try to stay in power,) while hoping for an oil price miracle.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product