Oil prices will not fall lower, Credit Suisse is confident. Demand for oil has stabilized, production in non-OPEC countries is declining, and, most importantly, it is profitable for Saudi Arabia to maintain prices at current levels

Saudi oil producers control 13% of oil production and the vast majority of spare capacity. In the last year, when the price of oil fell, they sought to maintain market share and avoid a repeat of the experience of the 1980s: then they had to reduce oil production by 70% to defend high prices. It is possible that at current prices, Saudi producers will consider that they have achieved their goal by pushing new competitors out of the market and will begin to support prices, Credit Suisse analysts wrote in the review “The Importance of Oil”, released on October 7.

Saudi Arabia has targeted American shale oil producers in its price war. For them, the breakeven point, according to Moody's calculations, is about $51 per barrel. Fixed costs for shale producers are significantly higher than variable ones, and shutting down production is easier than surviving a period of low oil prices, Credit Suisse analysts explain. In addition, unlike other oil exporters, American ones cannot compensate for changes in oil prices by parallel weakening of the currency (the dollar, unlike the ruble, does not fall following oil prices), they remind.

The Saudis may also be concerned about the budget deficit, which, due to low oil prices, amounted to 20% of GDP in 2015. Saudi Arabia's public debt is still very low at around 1% of GDP, but SAMA, which serves as the central bank, began selling its reserves this year and the country issued sovereign bonds for the first time since 2007, which could be considered as “signs of stress,” the review said. At the same time, the consequences of the Arab Spring, which increased social spending, and the armed conflict with Yemen, on which , according to the International Institute for Strategic Studies, the country could spend $1 billion in six months, limit Saudi Arabia’s ability to reduce budget expenditures, analysts recall.

There are other reasons that will not allow oil prices to fall lower, Credit Suisse analysts write. They point to signs of stabilization in oil supply from non-OPEC countries. According to the US Energy Information Administration (EAI), in the fourth quarter of this year, production growth in non-OPEC countries will not exceed annual growth in oil demand. Over the past three years, supply growth from non-OPEC producers has been twice as fast as global demand growth.

At the same time, demand is increasing, the review says. According to EAI forecasts, global oil consumption growth in the first half of 2016 will be 1.5% versus 1.1% growth this year. Given the drop in oil production, this offsets the effect of overproduction that is currently observed on the market, the review says.

Analysts note several other factors: oil is now more oversold than it was in 1985, when Saudi Arabia began regulating prices; In addition, speculative positions, the number of which has noticeably decreased since the peak in May, are increasing again.

Credit Suisse rules out further fall in oil prices