Can The Saudi Economy Resist ‘Much Lower For Much Longer’?

29-Sep-2015

the Saudis must alter course, seek a consensus on prices and volumes with their fellow OPEC members, coordinate with Russia, and reduce output from 2015’s average (approx. 10.5 mmbbl/d) to signal their commitment.

Why? Crude prices staying lower for longer will rapidly devastate the Saudi economy.

Goldman’s $20 scenario could turn out to be optimistic

In recent days, it seems the slogan “lower for longer” for crude prices has become “much lower for much longer.” September 11, Goldman Sachs revised downward its projection for average WTI and Brent per barrel prices in 2016 from $57 to $45 and $62 to $49.50 “on the expectation that OPEC production growth, resilient supply from outside the group and slowing demand expansion will prolong the glut.” Goldman also said prices could reach $20, albeit probably not for an extended period. At a recent conference in Alberta, Jeff Currie, Goldman’s head of commodity research, said low crude prices could persist for fifteen years and that Goldman’s long-term forecast is for $50 crude.

Goldman’s projections both in terms of average 2016 prices and $20 as a possibility could prove optimistic. In a situation of oversupply, which prevails currently, when oil-dependent economies must earn dollars to pay for imports and the interest and principal on US$ loans, the price elasticity of supply is sharply negative. As excess crude oil production threatens to exceed crude storage capacity the price of each incremental barrel of crude presumably could approach $1 for US$ hungry producers.

This is the kind of environment a September 14 Bloomberg article describes: intense competition between major oil exporting nations as Saudi Arabia fights to maintain its place as China’s chief crude supplier, and Iran, Russia, and Angola gird to compete fiercely for second place in this critical export market.  (by Dalan McEndree, Oil Price)