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Saudi Arabia advised to provide US oil price of $85 per barrel
Material posted: Publication date: 18-09-2014

U.S. Bank Bank of America Merrill Lynch believes that Saudi Arabia could increase oil production to reduce prices to $85 per barrel.

The fall in oil prices has hit Russia and Iran. This is stated in the Weekly energy research credit institution ( RBC). The document was published on 9 September.

Mutually beneficial cooperation

In favor of the prospect of decline in oil prices, experts BofA brought a set of interrelated geopolitical and economic arguments.

First of all, they pointed out the danger to Saudi Arabia from radical organization "Islamic state of Iraq and the Levant" (ISIL), which extended its influence to large areas of Iraq and Syria. The threat from ISIS is so severe that the United States began building a coalition of Western and Arab States to fight the Islamists, and the President of the USA Barack Obama has addressed this issue in a speech to the citizens.

"The withdrawal of the USA from hot spots around the world in recent years has resulted in a power vacuum. And it will fill the "Islamic state". We believe that Saudi Arabia and other countries in the region can have recourse to the protect its borders from the Caliphate. In exchange for the assistance the United States can offer the Arab States? The decline in oil prices", — stated in the study.

Western States would welcome such assistance, the report authors stress. Assistance of Saudi Arabia in reducing oil prices will lead to the weakening of the Russian economy. Excluding revenues from oil exports, the budget deficit of Russia in 2013, according to BofA, would exceed 10% of GDP. For a balanced budget, Russia needs a price of $105 per barrel, say analysts at BofA.

In turn, domestic economic difficulties due to the lack of revenue would force Moscow "to go to the de-escalation of the crisis in Ukraine".

Price $85 per barrel is significantly lower than included in the Russian budget. In 2014 he formed at the rate of $93 per barrel, while in 2014-2015 is $95 USD.

BofA, in its analysis, refers to the precedent of the mid-1980s – early 1990-ies, when the cooperation between Washington and Riyadh has led to the decline in oil prices. This led to a decrease in export earnings of the Soviet Union. Cheap oil is considered to be one of the factors that contributed to the crisis and subsequent disintegration of the USSR.

Another victim from low oil prices the experts of BofA called Iran, a longtime regional enemy Saudi Arabia, which also is under sanctions from USA and EU. Brussels stopped purchasing Iranian oil in 2012, under pressure from the USA, and then imposed restrictions on the Iranian financial sector. As a result of Tehran's revenues from hydrocarbon exports declined, according to OPEC, with $114,75 billion in 2011 to $62 billion by the end of 2013.

Price level $85 was selected analysts financial institutions due to the fact that, according to them, that is the cost of a barrel of Saudi Arabia's budget is deficit-free.

In addition, according to the authors, the Kingdom's budget will lose nothing if, instead of exporting 8.5 million barrels per day at $100 per barrel, the country will supply the market with 10 million barrels at $85. In 2014, fiscal spending in Saudi Arabia is projected at $228 billion.

Oil cooperation

The threat of lower oil prices Riyadh, which affected Moscow and Tehran could become one of the factors of rapprochement of the latter. Over the past few years, Russia and Iran are discussing the possibility of barter deals "oil for goods". In April 2014, Reuters with reference to anonymous sources reported that the deal could reach $20 billion, Russia will receive 500 thousand barrels of Iranian oil. In August of this year the parties have signed [] the Memorandum, however, is preliminary in nature and contains no specifics. Possible economic cooperation between Russia and Iran has already caused resentment on the part of the United States.

Not only politics

Experts of BofA said that apart from political reasons to increase oil supplies in gratitude for the help the US against ISIS, Saudi Arabia may be interested in decrease of oil prices for purely economic reasons.

In recent years, the U.S. significantly increased its own oil production, the main role was played by the "shale revolution". Assessment BofA, for the past four years, the production of liquid hydrocarbons in the United States increased by 3.6 million barrels per day. The energy information administration of the United States (EIA) predicts that in 2015 oil production at the level of 9,53 million barrels per day. For comparison: in August of this year, Saudi Arabia produced 9.6 million barrels per day.

High prices on the world market are a key reason for the active development of unconventional sources of oil in the U.S., which reduces the interest of Americans in imports. In the opinion of the authors of the study, the increase in supply from Saudi Arabia would help to slow the development of shale oil and to liaise between Washington and Riyadh.

The fall in oil prices to $85 would lead to the fall in the profitability of oil shale mining and the outflow of investors – only production costs per barrel of shale oil, the Bank is valued at $50-75.

However, experts BofA acknowledged that now Riyadh is in no hurry to increase exports of hydrocarbons. The barrel fell from $115 in mid-June to about $100 in early September. Despite that Saudi Arabia had not been significantly to increase supply – since June of this year, the Saudis increased exports by 2%.

After analyzing the response mechanism of the Kingdom to change prices, experts BofA came to the conclusion that since 2008 the fall in oil prices by 10% led to decrease of export supplies of Saudi Arabia by 1.5% in three months, while six months later the volume of deals increased by 2%.

The release of Weekly energy studies, dated 12 August ( RBC) BofA experts suggested that the Kingdom has significant opportunities to influence oil prices and will not allow the barrel to cost less than $100 in the long run.

In the same study, BofA noted that in recent years, despite geopolitical tensions and economic difficulties, the oil price remained at a relatively stable level. While Riyadh is in no hurry to disturb the balance between supply and demand on the world oil market.

A conflict of interest

BofA warned readers of the report that deals with States and companies about which he wrote in his report. The Bank recognized the conflict of interest that could affect the conclusions of the study.

Relying on our own strength

In order to reduce oil prices and cause economic difficulties in Russia, the U.S. can act alone. In the mid 1970-ies in the country was created the strategic petroleum reserve (SPR). Now it is designed to 727 million barrels of oil, and as of 2013 it has been accumulated 695,9 million barrels.

If Washington decides to sell at least part of their reserves, this could potentially significantly reduce oil prices worldwide. The last time the U.S. sold large amounts of oil from strategic reserves in 2011, during the fighting in Libya for fear of oil shortage on the world market.

In March 2014, Washington announced a "test" sale of 5 million tons of oil. Soon after the announcement of the American authorities in the global price of oil fell by $2. The media speculated that this may be a hint of Russia on the possibility of U.S. influence on oil prices. This theory was confirmed by the fact that the realized oil in its properties was similar to Russian.

At the same time, the American economist Philip Verleger that in the 1970s, he held various posts in the White house and the Ministry of Finance USA, in his review for the investors said it was possible painless for Washington to reduce the reserves of hydrocarbons, having sold them on the world market.

According to his calculations, if last year the United States sold 500 thousand barrels from the SPR, the price of Brent crude oil (it serves as a benchmark for Russian oil Urals) to the end of 2013 would have been $12 below its actual cost. The decline in oil prices by $10 per barrel will deprive Russia $40 billion of foreign exchange earnings.

In early September the blog for the Platts Agency, Verleger said that Moscow would not allow itself for such brazen actions in Ukraine, if the barrel was worth not $100, and $60.

The analyst said that if Washington decided to sale its entire strategic petroleum reserve to 700 million barrels, world oil prices collapsed to $50. And this is assuming that Saudi Arabia will maintain its current volume of exports. Even the Kingdom would benefit from the reduction in oil prices due to the loss of investor interest in oil production in the US. In this assumption Verleger fully coincided with analysts BofA.

"The reserves were created in the period when the US was dependent on imported oil. Now it's in the past. SPR has become totally meaningless," said the economist.

As analysts at BofA, Verleger called the main victims of a possible fall in oil prices is Russia and ISIL. According to him, "Russia is an example of an oil state". The reduction in oil revenues will cost the GDP of a country of 4-5%. In the case of ISIS more accessible oil will reduce the interest of buyers to illegal supplies from Iraq and Syria that will reduce the financial resources of terrorists.

In conclusion, Verleger recognized that victims of lower prices may become the American oil companies. In addition, the U.S. under such a scenario "is a long way to achieve energy independence."

Alexander Ratnikov

Source: RBC

Tags: USA , oil , Near East

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