THE POLITICS OF OIL - TRULY A HOUSE OF CARDS!

By Ruma Dubey

This oil company in Saudi, till last year, was housed in an entire building and today it is reduced to one floor. There are major layoffs, many huge oil offices are wearing a deserted look, expats seeking employment has surged to no avail with many forced to head back. To put things further into perspective, Saudi today announced that there would no bonuses for its Govt employees and it has announced salary cuts for ministers by 20%. The Govt has delayed payments that it owes to contractors and also cut fuel subsidies as it tried to manage the effect of the lower oil prices. Its Budget deficit has ballooned to 16% of the GDP in 2016, which is the highest among the world’s 20 biggest economies. This year too, deficit is expected to be over 10%. Some $20 billion worth projects are on the verge of being cancelled and it also plans to sell the kingdom’s first international bond, which could raise more than $10 billion.

Saudi Arabia has a 16% market share in the global oil production pie, followed by Russia at 15.3%. But in terms of financial reserves, in 2015 itself, Saudi was 16% in the deficit and Russia at 28%. Iraq has a 7% share of the global oil production and it is 30% in deficit. UAE is the only country in the Gulf which had a 38% surplus in its 2015 reserves though it has 4.7% share in world oil production. Iran stands at number four as far a production share in concerned though no data is known of its reserves. (see the table below the entire picture).

Even in Dubai, though it shows a surplus for 2015 and gets its income mainly from trading and tourism, the effect of the falling price of crude is showing. There too many offices have closed down and there are layoffs right across the board.

Thus there is no denying the fact that the pain of lower crude has started to hurt and this meet tomorrow in Algiers, North Africa is all important. This is an informal meet of the OPEC countries thus no binding decision will be made but yes, they could agree on a production cut which might get implemented during the “official” meet, scheduled on 30^th November in Vienna. Interestingly, the Algiers meet is also tomorrow and USA crude oil inventories data will also come in tomorrow but by 8 in the night.

There is no shred of doubt that a production cut essential for these OPEC countries if they want to boost oil prices and for that Iran and Saudi need to agree. Saudi is said to be amenable now, given its dire straits. Remember, it was Saudi which insisted that there would be no rate cuts, pumping near record amounts of crude for the last two years, trying to defend their market share by squeezing out higher cost producers such as the USA.

But will production cut alone help boost prices as most of these countries are already pumping at record highs with Iran also adding to the glut. In fact Iran has said that it wants to reclaim its place as one of the world's top oil exporters and that mantle is currently held by Saudi – how will it cut down if Iran continues to pump away?

Again, prices need to go up for these OPEC countries but not too much also as it would mean increased production costs, which in turn would mean USA will get back drilling for shale gas. Oil price above $60/barrel means that shale gas will be back into picture. This is what they have worked on – to ensure shale gas units shut down which will come undone if prices go up too much now.

It is thus a fine balance – production cut but not too much price rise. It has also been see, typically before any such meet, statements coming out that Saudi is close to agreeing to production cut, stoking up oil prices ahead of the meet. But nothing happens and oil falls down further. Iran has already said that it will not cut.

Lets see which way the oil prices go tomorrow….

PS: Yesterday it was the US Presidential debate and today and tomorrow it will be crude oil and Algiers meet which will rule equity market sentiments.