Oil, what awaits us? A question that is very difficult to answer, especially after the mini-rebound of these days, which immediately foundered. A super-expert like Leonardo Maugeri tries it in his latest briefing, from the Belfer Center of Harvard University of which he is a senior associate. “Oil, what's ahead?” above all, he analyzes the reasons for the Saudi refusal to cut production as several OPEC members requested in November; refusal that triggered the downward acceleration of crude oil prices, which sank below 50 dollars at the end of 2014.
“From various confidential sources within the Kingdom – Maugeri writes – I learned that, before taking this decision, the Saudis spent several months evaluating its effects on state accounts. Two scenarios examined. At worst, the Saudis calculated that they would have to make up for $10 billion a month with their own currency resources, a sacrifice they considered they could bear for at least a year, according to some. Others, who considered this hypothesis disastrous, however, did not dare to resist since King Abdullah shared it with the two major men: first, the oil minister Al-Naimi, the true architect of Saudi strategy; and secondly with the Minister of Finance, Al-Assaf”.
The strategy followed is convincing, observes Maugeri, since it was clear that leaving the market unchecked, the price could only collapse, pushed downwards by excess orders. In the Saudi calculation, however, there were some elements of weakness: for example, imagining that oil at 75 dollars would end up canceling a large part of the shale production of the USA and Canada, which instead did not happen - says Maugeri - because in the meantime technological advances and cost reductions have made production enormously less expensive.
“But King Abdullah's death has introduced a new element of uncertainty about the future of Saudi strategy,” Maugeri observes. Indeed, Minister Al-Naimi's relations with the new ruler Salman are not clear. Not only would they have had divergent views in the past but at the moment the sovereign's son, Prince Albdulaziz, appears to be number two in the oil ministry.
So things could change, but certainly not easily. And especially in the short to medium term, Al-Naimi's strategy does not seem to have any possible alternatives. Maugeri raises doubts about which producing countries could make the requested production cuts. Excluding Saudi Arabia which is already below its capacity by at least 3 million barrels-day, little or nothing remains: the internal problems of Libya, Iraq and Nigeria added to the sanctions that bind Iran's hands are already taking away 2,5 million barrels to the market. As for OPEC members such as Venezuela and the United Arab Emirates, they do not have enough room for maneuver to make significant cuts.
Among the non-Opec countries, Russia could come to the rescue, which has every interest in bringing oil prices back to more satisfactory levels for it, but it is very difficult for it to make agreements, even if temporary, with the cartel. Moscow does not trust the Saudis and indeed accuses them of having worked secretly and in agreement with Washington.
Maugeri argues that in the face of this situation the production cuts announced by the companies and producers mainly concern new projects rather than those already approved. A certain "productive inertia," he says, is unavoidable because companies and producers have to replace reserves. And shale production has proven to hold up at prices of $45 a barrel. “It is difficult to think of being able to cancel an excess production of about 2 million barrels a day in one year” is his conclusion. Unless there is a strong leap forward in the question: is it probable?
"From an economic point of view - concludes the Briefing - the factors we have examined seem to conspire towards one result: the maintenance of structurally low oil prices for a significant period". However, there are geopolitical consequences that need to be carefully monitored. “The fall in oil prices – warns Maugeri – can lead to political instability, even violent, in areas crucial for world oil production, starting with those on the Persian Gulf. If crises of this kind were to occur, it would follow that prices would rocket upwards, even in the presence of a weak market. As never before, analyzes of the oil market and possible investment choices require an analytical organisation, capable of considering all the variables that influence the evolution of the market itself, field by field and country by country. country, avoiding considerations based on a long-term scenario (beyond 2030) and on the uselessness of models based on these underlying scenarios”.
Attachments: OIL WHAT'S AHEAD.pdf
