Outlook for oil hit by Saudi Arabia budget cuts
The outlook for the oil price next year is under renewed pressure following strong signals from Saudi Arabia that the world’s largest crude exporter is preparing for a long period of low returns and amid expectations that Iran will further flood the global market when sanctions are lifted.
Analysts said plans announced by Saudi Arabia late on Monday to reduce a budget deficit of nearly $98bn through spending cuts, reforms to energy subsidies and a privatisation drive were a sign that Riyadh intends to stick with its policy of not cutting output.
It also shows that Opec’s de facto leader is prepared to accept cheap prices for its crude as it seeks to put pressure on higher cost rivals such as US shale producers and waits for the market to rebalance.
“They are responding to the low-price regime, the duration of which has surprised,” said Ole Hansen at Saxo Bank. “Having gone this far with their pump and dump strategy they sense that victory in the shape of non-Opec production cuts is just around the corner. Offsetting this in the near term will be the extra supply from Iran once sanctions are lifted.”
Another signal that Saudi Arabia is prepared to sustain its strategy of keeping the pumps open came from the chairman of Saudi Aramco, the state-controlled oil company, after the budget was announced on Monday. “We see the market balancing sometime in 2016, we see demand ultimately exceeding supply and soaking up a lot of the excess inventory and prices in due course will respond regardless of when and by how much,” said Khalid al-Falih.
“Saudi Arabia more than anyone else has the capacity to wait out the market until this balancing takes place,” he added.
However, oil prices moved higher on Tuesday supported by forecasts for colder temperatures in the US and as hedge funds and other speculators moved to close bearish bets before the end of the year. Brent, the international oil marker, rose 2.5 per cent to $37.53 a barrel, while West Texas Intermediate, the US benchmark, added 2.4 per cent to $37.68.
But a relentless rise in global oil production and ballooning inventories has resulted in the price of Brent crude falling 35 per cent this year to as low as $35 a barrel — the lowest level in more than a decade.
The market is expected to remain oversupplied in 2016 as Riyadh resists calls for production restraint and Iran, once Opec’s second-largest producer, prepares to increase output once sanctions linked to its nuclear programme are lifted.
Reports that the Iran nuclear deal was on track after Tehran dispatched a shipment of more than 11 tonnes of low-enriched uranium to Russia has renewed focus on the supply glut.
“Iran is gearing up to flood the market with 500,000 barrels a day within weeks of sanctions being lifted while the ceasefire in Libya may also add extra barrels,” Mr Hansen said.
Data showing weaker demand for oil products such petrol and diesel in Europe during October has also affected sentiment. “This is the first year on year decline this year after 10 months of consecutive gains,” noted analysts at consultancy JBC Energy.
“This might be the first indication that further demand gains induced by additional driving on the back of low prices is likely to be limited in 2016,” said JBC.
In the US, falling revenues and rising debt in the oil and gas sector have meant that lay-offs continued despite production declines. Since peaking in October 2014, US oil and gas employment has fallen 14.5 per cent, or by 70,000 jobs, year over year, according to the Federal Reserve Bank of Dallas.
“Job losses and falling energy prices portend continued distress for the oil and gas sector in 2016,” the Dallas Fed said in its latest energy update last month.
Meanwhile oil and gas sector bankruptcies have reached quarterly levels last seen in the Great Recession, with at least nine US oil and gas companies, accounting for more than $2bn in debt, filing for bankruptcy in the fourth quarter of 2015 said the Dallas Fed.