The West Texas Intermediate (WTI) spot price sank to a four year low on November 25, 2014, closing at $73.86. The Brent price settled at $78.17. The drops for both benchmark prices wiped out gains made in recent days and added more speculation on the highly anticipated OPEC meeting, scheduled for Thursday, November 27.
Four countries met in Vienna today, including two heavyweights: Russia and Saudi Arabia. Various outlets reported the four country representatives, which also included Mexico and Venezuela, did not agree to any production cuts, opting to endure the lower prices in order to hold market share. Brent and WTI both dropped more than $2.00 after the news surfaced.
“On a revenue basis, it’s their best proposition to cut production,” said Wayne Gordon, a commodity analyst for UBS, in an interview with Bloomberg. The firm expects prices to drop another $5 if no agreement is reached on Thursday.
Saudi Arabia certainly appears to be holding most of the cards in this scenario. The Saudis have repeatedly said they will not cut production in order to save prices, even though Saudi oil accounted for 90% of its 2013 revenue. Analysts have said the country’s leverage in the oil market allows it to test the economics of United States shale while simultaneously putting additional pressure on Iran – OPEC’s second largest producer who is currently limited due to sanctions from the West.
Russia is a nation also restricted by Western sanctions, and its ramifications have recently come to light. The country’s finance minister estimated losses of $140 billion per year due to sanctions and falling oil prices, with the latter causing the most damage. The Energy Information Administration (EIA) reported hydrocarbon revenues accounted for 68% of all Russian export sales in 2013. The ruble has also dropped in value by about 27% for the calendar year, further straining Russia’s budget.
Venezuela and Mexico are in much more strenuous situations. The current Brent price is as much as $40 below the breakeven price required for Venezuela, as projected by Deutsche Bank. Mexico recently ended its 76-year nationalization of the oil industry and is preparing for foreign investment. However, oil prices are approximately $30 lower today than when America’s southern neighbor privatized the industry last December.
Prices are not expected to recover any time soon. Several firms, along with the EIA, have already slashed 2015 prices. Gordon explained in the interview that, at the rate companies are currently exporting oil, the price issue will arise next year, regardless if a cut is implemented in Vienna’s meeting. In the meantime, some commodity managers are bracing for oil in the $60s if the OPEC meeting does not yield a change in production volumes.
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