An Early Victory in Saudi vs Shale
The new order for oil has kept shale out in the cold.
The early signs are that Saudi Arabia's new policy to cut oil production, which it hardened on Saturday with signals of possible further reductions, is working just as it wanted it to.
The decision taken by OPEC on Nov. 30 to cut output by around 1.2 million barrels a day has boosted near-term oil prices by around $10 a barrel. Contracts that are about to expire, which determine OPEC export prices, are up by almost 25 percent over the past month. That's good news for oil exporters.
However, the policy had a much smaller impact on prices several years into the future. The fact that futures prices have barely moved means there is still no strong incentive for U.S. shale producers to rush out to hedge their future production. Or, at least, that incentive is no stronger than it was a month ago. Shale oil that wasn't profitable before the OPEC deal was done is still not profitable now.
The flattening of the price curve also undermines the profits to be made from holding oil in inventories. This should encourage the reduction in stockpiles that OPEC wants to bring about.
As I wrote in October, Saudi Arabia is in a position to claim victory in its war on high-cost oil. The way the oil price curve has moved since the OPEC meeting would seem to bear that out.
An added benefit for Saudi Arabia is that the cut it has agreed to make to its production from January will only take its output down to where it was last winter, and not much below the production level for most of the first half of this year. Oil minister Khali Al-Falih said at the weekend that he could go further, perhaps taking Saudi output below 10 million barrels a day.
However, as Sadad Al-Husseini, Saudi Aramco's former executive vice president for exploration and development, said today, the deal is unlikely to affect Saudi exports. And that is what really matters for the kingdom's finances.
All in all, it looks a pretty good outcome for Saudi Arabia. Now all they have to do is hope that they can continue to keep a cap on future oil prices by convincing traders that they have the will and the ability to boost output when they need to.
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