Wednesday, 13 January 2016

Are the cracks finally starting to show in Saudi Arabia?

As the news flow from China begins to settle itself the intensity of focus that has been placed on OPEC member nations after a stalemate meeting held in Vienna last month seems to be gathering momentum as "black gold" prices continue to plunge on concerns of excess production.

In the latest twist to the tale, Nigerian minister for state petroleum resources Emmanuel Kachikwu said that OPEC may be close to calling an emergency meeting in early March, bringing forward the planned meeting that would be held in June after members, according to him, had expressed their grievances about ailing oil prices on their economies. He went further on to say that Saudi would approve of such a meeting if there was a consensus by all members for the need to hold one, a sign that perhaps the collusive oil body may be dealing with much more than just broken economies.

Calls have already been made by the likes of Venezuela and Nigeria to curb the production of oil but what seems to have intensified the urgency is the sudden change in diplomatic relations between Saudi Arabia and Iran. The former had stated explicitly at the bi-annual meeting in Vienna that it would not follow the organisations instructions should any be made for production to be cut as the nation was close to having sanctions that were imposed on it from the rest of the world for almost 10 years finally lifted which would put relief on a long suffering trade balance.

With no firm conviction from Iran, Saudi was left holding the baton with other members voicing their dissatisfaction at the move which would add roughly 1 million barrels per day to an oversupplied market battling to find storage.

Departing from the usual stance of cooperation would hurt OPEC in the long term as other nations may find the need to satisfy their own needs first before that of the organisation, a fact I have often eluded to a number of times on this blog and one that would ultimately make OPEC ineffective in manipulating world oil prices, a big plus for the world consumer.      
I've also said on a number of occasions that if we were to see an end to the oil rout we would need to see the bigger players suffering as a result rather than the smaller ones. The reason for this is the big players tend to hold more weighting in the decision making process and hold sufficient capacity to move the market on its own.

We've seen a number of stories materialising about US shale gas producers battling a debt crisis that has the possibilities to halt a copious amount of production being brought to market but so far we haven't seen too much concern yet. I say that because anything can develop in a short span of time so we can't simply write off those possibilities.

However it has been OPEC that has drawn much of the attention over the past few months with its squabbling between members and lack of cohesion providing a field day for those looking for a weakness in the system that may prove fatal enough to break the strenuous battleground that besets world oil markets with cheap oil but bankrupts oil producers and destroys jobs.  

Saudi Arabia has become known for its prudent approach to finances especially when you consider that 70% of government revenues come from the sale of oil. One can only imagine the devastating impact that's had on the budget as it now looks like investors who hold the very little debt the Arab nation has issued are willing to pay a higher premium for insurance for cover of default.

It would suggest that the financial implications of Saudi's actions are finally being felt at home and not only abroad amongst other member nations of OPEC. The worrying statistics reveal that Saudi has been on an active path of drawing down reserves to fund the shortfall created from lower oil prices but the rate at which these reserves have been leaking out the system has gotten to the level of unsustainable and now it turns to the international and local debt market to raise money to fund its budget.

Saudi Arabia finds itself in a precarious position where it may be forced to consider what priority holds more importance to the well being of its economy. Do they abandon expansionary production measures and begin the process of allowing the world economy to mop up the excess supply but risk conceding to alternative energy forms which may come back to haunt them later on as the oil market shrinks with new technology hot on the heels of sustainable renewable energy that would drive the world forward or do they continue their offensive against such producers and dominate the world oil markets for many more decades to come?
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