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Saudis Sitting Pretty in Global Oil Price Plunge

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The bear market in oil is showing the world there’s still only one country in a position to choose winners and losers in the global market: Saudi Arabia.

The world’s largest oil exporter is trying to protect its market share by keeping its production steady even as prices hit a four-year low. Energy producers in turmoil, such as Russia, Iran and Venezuela, stand to lose the most, U.S. shale drillers and other Saudi rivals will suffer and industrialized importing countries including Japan will get a boost from cheaper prices.

“Saudi Arabia is the only one in the position of putting more oil on the market when they want to and cutting production when they want to,” said Edward Chow, a senior fellow at the Center for Strategic & International Studies in Washington. “Consumers win, producers lose.”

Brent crude, the international benchmark, fell as much as 29 percent since June 19 to $82.60 a barrel, the lowest since November 2010. Prices have averaged above $105 a barrel since 2011, the four highest years on record. Brent will stay higher than $80 a barrel, analysts at Bank of America Corp. and BNP Paribas SA said Wednesday.

While cheaper crude erodes Saudi Arabia’s income, too, the country has enough reserves and credit to withstand the slump, Chow said. The kingdom needs $83.60 a barrel to balance its budget, and the central bank has $734.7 billion in reserve assets, the International Monetary Fund said. The Saudis ran deficits from the mid-1980s until the late 1990s and may be prepared to do so again, according to Chow. Brent traded at $82.96 as of 12:58 p.m. in London.

Increased Output

Kuwait, Qatar and the United Arab Emirates should be able to weather lower oil prices for the same reasons, Fahad Al-Turki, head of research at Jadwa Investment Co. in Riyadh, said by phone Oct. 15. Countries that haven’t been able to save, such as Iran and Iraq, will be more vulnerable, he said.

Saudi Arabia increased September output 0.5 percent to 9.65 million barrels a day, according to data compiled by Bloomberg. The Organization of Petroleum Exporting Countries pumped 30.9 million barrels a day, the most in a year. Saudi Arabia, Iraq and Iran are offering the biggest discounts to crude buyers in Asia since at least 2009.

“The Saudis are trying to protect their patch in Asia,” Daniel Hynes, senior commodity strategist at Australia and New Zealand Banking Group Ltd., said by phone from Sydney Oct. 15.

With new drilling technologies pushing U.S. output to the highest in 28 years, the International Energy Agency predicted the U.S. would pass Saudi Arabia to become the world’s top producer by 2015.

Shale Boys

The Saudis are having none of that, T. Boone Pickens, the founder and chairman of BP Capital LLC, said Oct. 9 on Bloomberg Television.

“They may be just teaching the crowd in the U.S., the shale boys, a lesson,” Pickens said.

Lower prices could slow the U.S. boom because extracting oil from shale costs $50 to $100 a barrel, compared with $25 a barrel for conventional supplies from the Middle East and North Africa, according to the IEA.

The Saudis, OPEC’s biggest member, might actually want the price collapse because it hurts rivals Iran and Russia in addition to slowing U.S. drilling, said Bruce Jones, a senior fellow at the Brookings Institution in Washington.

The government in Tehran faces falling energy sales, its main source of proceeds, because of international sanctions over its nuclear program. Revenue from oil and gas exports fell to $56 billion in the 2013-2014 fiscal year, from $118 billion in the year ending in March 2012, the IMF said. Negotiators are seeking a comprehensive nuclear accord by Nov. 24.

Vulnerable Russia

“Knowing that Iran is going to struggle, that’s something Saudi Arabia would certainly enjoy,” said Reva Bhalla, vice president of global analysis at Stratfor, a geopolitical intelligence and advisory company based in Austin, Texas. Falling oil prices “put all the more pressure on Iran to try to seal a deal.”

Russia is also vulnerable because of its dependence on oil sales at about $100 a barrel, Bhalla said. U.S. and European sanctions over Russia’s involvement in Ukraine sent the ruble to a record low and the IMF reduced its forecast of economic growth for 2015 to 0.5 percent.

Oil at $90 a barrel will cut 1.2 percent from Russia’s GDP, according to Sberbank CIB, an investment bank.

The Russian budget loses about 80 billion rubles ($2 billion) for every dollar the oil price falls, according to Maxim Oreshkin, head of strategic planning at the Finance Ministry.

Importers Gain

Consumers in importing nations also stand to gain, especially in Japan, China and Europe, said Gary Hufbauer, senior fellow at the Peterson Institute for International Economics in Washington.

Japan imports all its energy after closing nuclear reactors because of the 2011 Fukushima disaster. It hasn’t restarted any of its 48 plants even as the country’s regulator cleared two to reopen. Japan bought 4.5 million barrels a day last year, outranked only by the U.S. and China, according to data from BP Plc.

The blow to U.S. drillers is more than offset by savings for consumers. The roughly $20 decline in oil prices should boost U.S. gross domestic product by about 0.4 percent, according to Ethan Harris, an economist at Bank of America Corp. The stimulus should appear quickly because about half of Americans live paycheck to paycheck and will spend the money they save, Harris said. Any decrease in oil-industry investment would take longer to register, he said.

Strategic Reserves

The price drop is an opportunity for China to build up its strategic reserves, according to Andrew Kennedy, a senior lecturer at the Crawford School of Public Policy at the Australian National University in Canberra. China relied on imports to meet 57.4 percent of its crude consumption in 2013, government data showed. In the first eight months of this year, China imported about $157 billion worth of crude, with the most coming from Saudi Arabia at about 16 percent of the total, followed by Angola at 13 percent and Russia at 10 percent, according to customs data.

“Generally, the declining price of oil is a good thing for China as it could reduce the cost for the oil-refining industry,” Chen Rui, oil market researcher of CNPC Economics & Technology Research Institute, said in phone interview.

While lower prices will reduce the profitability of deep-water oil and gas projects, Petroleo Brasileiro SA (PBR), Brazil’s state producer, known as Petrobras, will benefit in the short term by removing subsidies on fuel, Chris Kettenmann, chief energy strategist at Prime Executions Inc., a broker in New York, said in a phone interview.

Lower Prices

Petrobras was able to sell gasoline in Brazil at a premium to international prices in late 2008 and 2009 during the most recent slump in global oil prices. Petrobras’s fields in the so-called pre-salt region will remain profitable if Brent stays above $45 a barrel, according to the company.

Lower oil prices may lead to less of a bonanza for Mexico as it ends a 76-year-old state oil monopoly and opens up to private investment, according to Marco Oviedo, chief economist in the Latin American country for Barclays Plc. The nation is set to hold its first round of auctions next year for oil production contracts that’s forecast to attract nearly $13 billion of investment a year through 2018, according to the Energy Ministry. It will also offer joint ventures with state-owned Petroleos Mexicanos.

“Mexico is going to have a very, very important round-one bidding process in just a few months,” Marcelo Mereles, a former Pemex executive who’s now a partner at EnergeA, an energy consultant, said in a phone interview from Mexico City. “ The lowered oil prices could cause bidders to be less aggressive and or shy away from investing in Mexico immediately.”

Strained Venezuela

Venezuela is showing more strain than its OPEC peers and called for an emergency meeting of the group, the country’s foreign minister said on the ministry’s Twitter account Oct. 10. President Nicolas Maduro is contending with a dollar shortage caused by years of currency controls, supply shortages and the world’s highest rate of inflation that deterred foreign investment.

Venezuela’s oil industry accounts for 96 percent of the country’s dollar export earnings, according to Petroleos de Venezuela SA, the state producer. For each $1 a barrel drop in oil prices, Venezuela loses estimated revenue of $700 million a year, PDVSA estimates. An average of about $85 a barrel would deny PDVSA about $11 billion.

Wild Card

“The real wild card in this whole thing is Venezuela,” said Philip Verleger, an independent consultant who worked in the Ford and Carter administrations. “The economic situation is getting really bad. It’s just possible things could blow up and you could lose a couple million barrels a day of exports.”

The country’s information and oil ministries didn’t respond to e-mails seeking comment.

Yields on dollar bonds sold by Nigeria jumped yesterday the most since they were issued in July 2013 to the highest level since April. The currency of Africa’s biggest oil producer weakened as Standard Chartered Plc said the oil slump may curb the country’s ability to support the naira leading up to February elections.

Exports of oil and natural gas accounted for 96 percent of Nigeria’s export revenues in 2012, the IMF said. The government in Abuja budgeted for oil at $79 a barrel in 2013 and saves surpluses from higher-priced years to use when revenue falls below target, according to the IMF.

Budget Deficit

In Angola, oil’s contribution to GDP will fall 3.5 percent this year and the government also feels the impact of lower prices, President Jose Eduardo dos Santos told lawmakers in Luanda, the capital, yesterday.

The southwest African country depends on oil for 46 percent of its GDP, 80 percent of government revenue and 95 percent of exports, according to the African Development Bank. Angola will probably have to increase its budget deficit, already estimated at 4 percent for this year by the IMF, if prices stay below the $98 a barrel used in calculating the 2014 budget, Markus Weimer, director of Faktor Consult Ltd., a London-based consultant, said in an e-mail.

The countries most vulnerable to lower prices, as measured by the percentage of their 2014 economic output derived from oil exports, are Equatorial Guinea (at 79 percent), Brunei Darussalam (74 percent), Libya (60 percent), Republic of Congo (57 percent) and Kuwait (55 percent), according to April 2013 estimates by the IMF.

The biggest beneficiaries, measured by the percentage of GDP spent on importing oil, are Singapore (43 percent), Seychelles (25 percent), Lithuania (23 percent), Bahrain (23 percent) and Liberia (20 percent), data show.

– Check out PIMCO’s New CIO Gives Global Outlook, Sees U.S. Energy as Key Tool on ThinkAdvisor.