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.
Important disclosures: The information provided herein is believed to be reliable; however, EnerCom, Inc. makes no representation or warranty as to its completeness or accuracy. EnerCom’s conclusions are based upon information gathered from sources deemed to be reliable. This note is not intended as an offer or solicitation for the purchase or sale of any security or financial instrument of any company mentioned in this note. This note was prepared for general circulation and does not provide investment recommendations specific to individual investors. All readers of the note must make their own investment decisions based upon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Investors should consider a company’s entire financial and operational structure in making any investment decisions. Past performance of any company discussed in this note should not be taken as an indication or guarantee of future results. EnerCom is a multi-disciplined management consulting services firm that regularly intends to seek business, or currently may be undertaking business, with companies covered on Oil & Gas 360®, and thereby seeks to receive compensation from these companies for its services. In addition, EnerCom, or its principals or employees, may have an economic interest in any of these companies. As a result, readers of EnerCom’s Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this note. The company or companies covered in this note did not review the note prior to publication. EnerCom, or its principals or employees, may have an economic interest in any of the companies covered in this report or on Oil & Gas 360®. As a result, readers of EnerCom’s reports or Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.
