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Tango three: as part of the strategy of the United States, Saudi Arabia and Russia will change the price of oil
Material posted: Publication date: 13-05-2018
If the United States fails to timely compensate for the volume drop of the world's petroleum balance as a result of planned production cuts by OPEC, Russia and other producers, the oil market is in surplus can occur in a sustainable deficit.

Russia, Saudi Arabia and the United States — three of the world's largest manufacturer produces more than one third of all oil in the world. The strategy in each of these countries, their competition and cooperation are determinant for the dynamics of the world prices for oil.

Measure the global competitiveness of US oil companies — industry costs. From a technological point of view, the production of tight oil in the US has become in the production process with short investment cycles, in which the on/off production, need for balancing, it becomes a simple function of investment in the implementation of necessary technical measures. In a competitive market in the US and in the absence of fundamental limitations on financing and the availability of drilling equipment and conducting the hydraulic fracturing needed to maintain production, depending on the current economic viability of projects as costs due to production of tight oil large enough. Assessment of the range here range from $30 to $60 per barrel and strongly depend on the correlation of structural and cyclical factors in their formation.

In Saudi Arabia, the cost of oil production is very low, below $10 per barrel, but in the long-term global competition, the Saudis have an additional focus on the budget break-even prices, which topped $100 a barrel in the fat years of high oil prices. Faced with a serious challenge to its economic model and long-term international competitiveness, over the past few years, the Kingdom has managed to reduce the budget break-even prices from $106 per barrel in 2014 to $70 per barrel in 2018, according to IMF calculations.

Russia's position in the middle. Dollar lifting costs of Russian oil companies is comparable with the cost of production in the middle East, especially after the massive devaluation of the ruble, and a sliding scale mineral extraction tax and export duties DAMPS the tax burden at lower world price environment. However, logistics costs for the supply of Russian oil to the market increase its cost, and the country's budget depends heavily on oil prices and its balance in the coming years requires oil prices below $55 per barrel.

The need to consider not only the cost of production, but prices are required to balance the state budget, tends to equalize the positions of the three key players in the struggle for the main prize — the impact on the global oil market.

Photo Getty Images

Thus in contrast to manual control, which uses Saudi Arabia and to a lesser extent Russia to redress imbalances in the world oil market, in the competitive American market, the process of balancing production and demand due to the presence of many players is regulated by the invisible hand of the market. But if the key to solving the problem of cyclical overproduction will not be OPEC+, and the US — the world's largest oil producer, the largest consumer and net importer, the United States will be able to affect prices for American consumers and producers.

When in November 2014 against the background of record growth in US production, the government of Saudi Arabia decided to shake up the world oil market, ceasing to balance the supply of oil, they hardly expected that his actions open a Pandora's box. Relying on the fact that market forces eliminate themselves excess supply, the cartel is clearly counting on a quick victory. Low oil prices were to lead to a crisis and production decline in Russia and the slowdown in the growth of shale oil in the United States.

However, the rebalancing of the world oil market (elimination of the surplus supply and the reduction of inventory reserves) was delayed for several years, and trench warfare between the producers of tight oil in North America, on the one hand and OPEC led by Saudi Arabia on the other, has forced both sides to work in survival mode.

In 2015-2016 Saudi Arabia had hoped that she would be able to shift the burden of balancing global supply producers of tight oil in the United States, and to increase market share at the expense of squeezing out of the market producers with high production costs. But it soon became apparent that the producers of tight oil in the US was much more resistant to competitive prices and managed to gain a foothold in the middle of the cost curve, offers.

This is partly due to the impressive technological breakthrough that allowed development of the most productive areas of fields, providing a high level of production with fewer rigs. The use of multilateral wells has heightened this effect, as manufacturers were able to drill wells less vertical, but more horizontal branches from the main stem. Another explanation is a kind of symbiosis in shale oil production and the US financial system with a wide variety of hedging prices, affordable financing and low interest rates.

Problems in Saudi Arabia related to oversupply and shale oil production in the USA began to be resolved under the influence of low prices. Only when the volumes of supply and demand were close in 2017 and Saudi Arabia have made significant downturn in US production, you could try to re-engage in a purposeful control of the market through production cuts of OPEC, having the effect of a much larger price changes.

The success of this strategy for OPEC is critical to enlist the support of Russia. In the interests of OPEC and Russia coincide, and they managed to agree a joint restriction of output, removing from the market in 2017, 1.7 million barrels per day. At the same time low oil prices have increased the elasticity of demand, and consumption growth has accelerated the rebalancing of the market. The deal Saudi Arabia and Russia have proved successful and led to a substantial increase in prices, which in the beginning of 2018 exceeds $70 per barrel. This, however, caused a second wave of production growth of tight oil in the United States.

The latest forecasts of international agencies say about a sharp growth of oil production in the US over the next few years, and it can fully balance the increase in world demand. The implementation of such a scenario will lead to a transformation of the US from a net importer of oil and oil products to a net exporter, which will be one of the most significant transformations in the world oil market.

Photo by Ramil Sitdikova / RIA Novosti

But if the American producers will not be able to timely compensate the volume of global supply, dropping out of the global oil balance as a result of planned production cuts by OPEC, Russia and other producers, the oil market is surplus in which we lived the last few years, you may experience persistent deficits and price targets dramatically shifted the threshold of the short-term marginal cost threshold of the cost of a full cycle.

In these conditions, there may be prerequisites for a sharp rise in prices may only a short-term, but however quite sensitive for both producer countries and consumer countries.

In the result happening before our eyes reset "oil matrix" we will witness the emergence of new winners and losers in the global oil arena as well as the formation of new rules of the game. Thus, depending on the depth and duration of the crisis, the transformation of the sector and adaptation of the economies of producer countries to the new conditions can go both on evolutionary and more radical way.

Vitaly Ermakov


Tags: Russia , USA , oil , Saudi Arabia

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