Bear market, or how to survive the oil crisis

January brought a further decrease in oil prices. The accession to the throne of the new king of Saudi Arabia Salman Ben Abdel Aziz only strengthened the speculation: how will the change of the monarch affect the export of the kingdom and the decision of the OPEC? From the statements of representatives of the Saudi elite, it follows that they began to prepare for a protracted "bear market". With the least losses from the current situation, those exporters who also exert it and will begin reforms aimed at increasing production efficiency.

What are the sedates worried about?

The market reacted to the death of King Abdullah with an inconspicuous increase in oil price, which lasted only a few hours. We can say that the reaction was purely symbolic: a kind of tribute to a person, for the words of which they so carefully followed for many years. Members of the Royal Saudis family continue to remain in the center of attention of the media, but journalists interpret their behavior from the standpoint of the structure of the energy market that existed in the past. Hence the bewilderment: why does Saudi Arabia persist and do not reduce prey?

The answer is that the Saudis was one of the first to catch a change in market conditions. For many, this hardly fits in the head: the elderly rulers of the conservative country itself on earth are not perceived as effective market analysts. Moreover, their religious radicalism in combination with Sharia causes a natural misunderstanding, and sometimes an open protest in modern society. But the world is full of paradoxes. In fact, Saudi Arabia turned out to be an authoritarian gerontocracy with a good entrepreneurial vein.

In December, the Saudi oil minister Ali al-Nami gave an unusual frankness in an interview in which he explained the reluctance to reduce prey. The eighty-year-old oilman with Stanford’s diploma maximum intelligibly formulated the position of his country: “When price falls, other manufacturers will suffer much earlier than we will feel something at all.” At a cost of extraction of 3-8 dollars per barrel of Saudi oil, few can compete with survival in low prices. If earlier Saudi Arabia as the actual leader of the OPEC was ready to limit the level of exports in the hope of maintaining the price, now she has abandoned such attempts.

There are two main reasons not to reduce prey. Al-Nami speaks of one openly: having cut off the production of oil, Saudi Arabia will simply pay the loss of a share in world production. In the future, other countries, in particular Russia, Brazil, as well as, with the time of the United States, which are not related to OPEC, will not be occupied in the future. Yes, and the members of the OPEC themselves, according to experience, observe quotas quite reluctantly, often violating the agreement. Being an oil producer with the lowest costs, Saudi Arabia does not want to support other countries that will much earlier feel the effect of price reduction. Although the abstract solidarity of the oil exporters is still mentioned, but rather ritual. In reality, the principle "everyone is for himself."

Oil production costs in the world
(based on data at 2222 deposits)

Source: Wood Mackenzie

Revelations of the Milliarder Prince and the lessons of the 80s

The second reason for the refusal to reduce the prey is more fundamental, Al-Nami does not openly speak. But this is eagerly argued by the multimillard, Prince Alvalid Bin Talal , who is also called "Saudi Warren Buffet." Bin Talal, although a member of the Saudis dynasty, he is not included in the government and allows himself sometimes rather independent and frank statements. He formulated the logic of a recent decision extremely simply: "Having reduced prey, Saudi Arabia would have suffered twice: firstly, due to the fall of production, and secondly, due to reducing prices." This phrase accurately conveys the essence of what is happening: there is good reason to believe that the reduction in the production of Saudi Arabia would not seriously affect the price of oil. That is, the change in the price would be so insignificant and so short -term that it would simply not justify the reduction in its share in the market.

In January, Jadwa, which provides detailed analytics in the economy of Saudi Arabia, published a report in which she estimated the likely deficit of the kingdom budget in 2015 at 6%, and the slowdown of growth - from 3.7 to 2.5% of the GDP per year. This in itself is not a disaster for the economy, but a strong enough signal to warn the government against risky steps.

Today's cautious economic policy of Saudi Arabia is based on a rich and not always successful experience - it has already been burned about its own decisions. So, an attempt to raise oil prices in the early 1980s was not successful: Saudi Arabia reduced the production almost three times-from 10.3 million to 3.6 million barrels per day, and the price continued to fall, which eventually became a difficult economic test for the kingdom (real per capita income was then reduced by almost a quarter). Other manufacturers tried to benefit from this - the Soviet Union increased oil sales up to its very breakfast. Saudi Arabia reached the previous levels of prey only twenty years later, and it will most likely not restore the share in the market. Now the Saudis have learned some lessons of the past, and they have no desire to repeat the old mistakes.

Oil production in Saudi Arabia, the USA and Russia, since 1965

Source: BP Statistical Review of the World

Conspiracy theories

From the statements of representatives of the Saudi elite, a fairly clear logic of making economic decisions is formed, which, I must say, is quite market and pragmatic. Despite this, conspiracy theories are very popular in Russia. According to one of them, the Saudis specifically do not reduce oil exports to “punish” Russia. In other circumstances, this theory could be just a reason for jokes, no more. But the problem is that conspiracy from marginal discourse has turned into a key element of information policy in Russia. The confrontation with the West and sanctions led to the fact that the conspiracies are now seen on every corner, enhancing the effect of the besieged fortress. Therefore, this theory should still say a few words.

The version of the “punishment” of Russia by Saudis is illogical from all points of view. In a political sense, it is not clear for what, and most importantly, why did Saudi Arabia intervene in the conflict of Russia and the West? In the Middle East there are a lot of unresolved problems - the foci of armed confrontation, which seriously threaten the safety of the kingdom, are blazing there with might and main. It is worth noting that the foreign policy of Saudi Arabia is much less rational than its current economic course. It was this inconsistency that aggravated the problems that the kingdom now had to face. The spread of super -conservative Wahhabi Islam turned around the radicalization of part of Muslims, which made up the backbone of ISIS and other similar formations. But these are all problems “among their own”, which the Middle Eastern countries themselves have to deal with. The assumption that Saudi Arabia will sacrifice his own economic interests for the sake of someone else's conflict for her, simply contradicts common sense.

In economic terms, the theory of conspiracy proceeds from the fact that Saudi Arabia can adjust the price at any time, reducing the prey. But, as already mentioned, the experience of the 80s showed that this kind of intervention turned out to be counterproductive primarily for Saudi Arabia itself. In today's conditions, its impact on prices is weakened even more, since it actually lost the status of Swing Producer, which gradually moved to the United States, which Saudi princes and ministers directly and indirectly recognize in their comments.

Pain threshold

Last year, it was noted that the total oil production in the United States in June reached the first place in the world, reaching 11 million barrels per day for the first time since 1972 (they reached the first place in gas production back in 2010). Observers then wondered when this would cause a reaction in the oil market. The reaction followed, albeit with a delay. A storm began on the market, which still does not subside. According to the forecast of the International Energy Agency, the United States has the opportunity to increase production to 13.1 million barrels per day until 2019. It is clear that low prices may not allow the United States to reach this level. But here it is important that the United States, in principle, has the opportunity to increase and reduce production in response to price fluctuations, which, in fact, is the main characteristic of Swing Producer.

This is one of the features of the shale deposits: due to small sizes, the drilling of new wells is not capital -intensive. The productive cycle of such wells is short -lived. When oil prices fall below the cost of production, you can quickly produce oil in the available wells, after which not to drill new ones until prices rise. Accordingly, production volumes can also be rapidly increased by drilling new wells, which is not associated with significant capital costs. This distinguishes them from large wells in traditional deposits. By the way, it is the old giant deposits in Western Siberia that are the basis of Russia's oil production, which makes the prospects for low prices especially risky: drilling new wells at such deposits at low prices can be an economically unbearable task.

Now everyone is wondering when the price of oil "gropes the bottom." The energy analytical company Wood Mackenzie has published a report when low oil prices can lead to mining. The company that has one of the most complete databases on oil reserves in the world analyzed the cost of production (operating costs) at 2222 deposits, in which three quarters of all global oil are mined. The company concludes that at $ 40 per barrel only 1.5 million barrels per day out of 75 analyzed day will go into the category of unprofitable (that is, only 2%).

The share of Saudi Arabia and OPEC in world oil production since 1965

Source: BP Statistical Review of the World 2014

But not even all of these one and a half million barrels per day will instantly fall out of world production, some manufacturers will prefer to continue to extract, reducing costs. Note that we are talking about a price of $ 40 per barrel - the market has not yet sank to this level.

So far, several organizations and companies have made a sharp decrease in price forecast in 2015. The US Department of Energy (US EIA) foresees the average price in 2015 $ 57.6 per barrel of Brent brand, IMF - $ 56.7. The forecast of the banking sector is even more skeptical: Bank of America Merrill Lynch - $ 52, Goldman Sachs - $ 50.4.

Adaptation to the "bear market"

Now the main answer of mining companies to low prices is the optimization of production. On the one hand, now all the attention is focused on the offer of oil: how many barrels this or another country can put on the market and at what price the prey will begin to contract there. But the volume of prey is only part of the whole picture. We will not forget that the collapse of prices is the result of both the rapid increase in production capacities and a slowdown in consumption. And the point is not only and not so much in the fall in the forecast of the growth of the Chinese economy or some other separate consumer (although this played a role). The main thing is that the world as a whole and the Western countries in particular made a huge breakthrough towards energy consumption efficiency.

A characteristic example is a decrease in the volume of liquid fuel consumption in the engines. In the 1990s, the average fuel consumption in trucks, cars and aviation vehicles in the world was 31, 10 and 5 liters of fuel per 100 kilometers of path, respectively. To date, the consumption has decreased to 28, 8 and 3.5 liters, respectively. And this is a systemic shift, and not short -term volatility - the world will no longer return to the use of old engines, and in the future energy efficiency will only increase.

If you summarize, it turns out that several strategic factors that increase the proposal and slow down demand created a critical mass of changes in the global oil market. These factors came together in time, which led to price correction. One of the manufacturers realized new realities and has already begun to adapt to them. The fastest reaction followed from international companies: the staff cutting, revision of contracts with contractors, reduction of budgets for captas began . The governments of some countries also responded to changes. Saudi Arabia and the UAE announced that they began to prepare for a prolonged "bear market."

In Russia, the transition from the stage of denial to the stage of recognition of the problem has not yet occurred (something similar was with the problem of sanctions, which I wrote about in the previous article ). The reaction is still mainly reduced to pulling out the most sky -high forecasts from the media space in an attempt to “speak” the price towards the increase. But arguing with the market or offended by it is a rather unpromising activity. By the way, as well as a hope for a change in moods on a “fateful” OPEC session in June. Ultimately, the main question is who can quickly adapt to changes and increase production efficiency. With the least losses from the current situation, those exporters who are the first to realize and begin to act.