In the wake of a global recession that has oil prices off 70 percent since mid-summer Saudis say 2 million barrel production cut likely
OPEC powerhouse Saudi Arabia said Tuesday that the oil cartel would cut production by about 2 million barrels a day to halt a precipitous fall in prices.
Oil minister Ali Naimi said “supply is still somewhat in excess of demand” and global stockpiles are higher than normal, reflecting comments made earlier by OPEC President Chakib Khelil and other delegates.
“Of course, to bring things in balance, there will be a cut … to the tune of about 2 million barrels,” Naimi said.
The presence of a high-level delegation from nonmember Russia, the world’s second-largest oil producer, and the bleak outlook OPEC painted in its latest market report only added to investors’ hopes that coordinated action would be taken to stop crude’s rapid slide from the record it hit in July above $147 a barrel.
OPEC has already cut production, at least in theory in theory, but cartel “cheating” has always been rampant. Now with costs of production exceeding prices for some supplies OPEC Looks to Halt Falling Oil Prices
OPEC is meeting Wednesday in the coastal city of Oran, Algeria, to discuss ways to stem the drop in prices. Chakib Khelil, the organization’s president and the Algerian oil minister, suggested last week that producers would approve “a severe production cut to stabilize the oil market.”
“We have to act — we see a very sizable reduction,” OPEC’s secretary general, Abdalla Salem el-Badri, told reporters on his arrival on Monday in Oran.
The problem is that OPEC’s actions so far have had little impact on the market. OPEC members have already met three times since September, and agreed to trim their output by two million barrels a day.
But the price of oil has dropped by 30 percent since October, the last time OPEC promised to cut production. With demand falling rapidly, there are few reasons to expect the drop in prices to slow down.
Part of the problem for OPEC is that producers simply cannot reduce their production fast enough to match the drop in consumption.
OPEC has found it much easier to remain united within its ranks when prices rise than when they fall. To prevent their revenue from falling too quickly, some producers have failed to trim their production as much as they promised.
Estimates of how much OPEC is pumping currently vary; the cartel does not disclose production numbers. The consulting firm Petrologistics, which tracks the movement of oil tankers, believes producers reduced their output by about one million barrels a day in November.
As prices drop Big Oil Projects are Put in Jeopardy
From the plains of North Dakota to the deep waters of Brazil, dozens of major oil and gas projects have been suspended or canceled in recent weeks as companies scramble to adjust to the collapse in energy markets.
The list of projects delayed is growing by the week. Wells are being shut down across the United States; new refineries have been postponed in Saudi Arabia, Kuwait and India; and ambitious plans for drilling off the coast of Africa are being reconsidered.
Investment in alternative energy sources like biofuels that had flourished in recent years could dry up if prices stay low for the next few years, analysts said. Banks have become reluctant lenders, especially to renewable energy projects that may prove unprofitable in an era of low oil and gas prices.
These delays could curb future global fuel supplies by the equivalent of four million barrels a day within the next five years, according to Peter Jackson, an energy analyst at Cambridge Energy Research Associates. That is equal to 5 percent of current oil supplies.
The biggest cutbacks so far have been in heavy oil projects in Canada, where some of the world’s highest-cost production is concentrated. Some operators there need oil prices above $90 a barrel to turn a profit.
StatoilHydro, a large Norwegian company, recently pulled out of a $12 billion project in Canada because of falling prices. Similarly, Shell, Nexen and Petro-Canada have all canceled or postponed new ventures in the province of Alberta in recent weeks.
Canada Oilsands Stocks Whipsawed
Bloomberg is reporting Oilsands Stocks Whipsawed by Merger Talk
Canada’s oilsands miners, developing the largest reserves outside Saudi Arabia, are being roiled by takeover speculation after the 72 percent drop in crude prices delayed projects and ruined the outlook for profits.
Nexen Inc. and Opti Canada Inc., owners of the Long Lake oilsands mine in Alberta, soared as much as 53 percent last week on the Toronto Stock Exchange after the Financial Times said France’s Total SA planned a C$19.7 billion ($15.4 billion) offer for Nexen. Both retreated more than 10 percent a day later when the Times of London said Total won’t bid.
Companies from Royal Dutch Shell Plc to Suncor Energy Inc. are putting projects on hold after oil slid more than $106 a barrel as recessions in the U.S., Europe and Japan cut energy demand. Crude under $95 a barrel makes it unprofitable to develop oilsands, in which bitumen dug from mines or coaxed from the ground using steam is turned into oil, according to Ryan Todd, an analyst for Deutsche Bank AG in New York.
An equal-weighted index of four oilsands developers –Opti, Nexen, UTS Energy Corp. and Petro-Canada — dropped 77 percent this year, compared with a decline of 38 percent in the Standard & Poor’s/TSX Composite Index, and a 39 percent retreat in a broader gauge of Canadian energy producers.
Opti lost 88 percent in 2008 to C$1.95 after delaying expansion of the C$6.1 billion Long Lake mine, saying it doesn’t have enough cash. UTS, an investor in the C$25.3 billion Fort Hills, Alberta, project, became a penny stock, slipping from C$6.09 in May, while partner Petro-Canada retreated as much as 65 percent from its peak that month.
UTS trades at 82 cents, valuing it at C$389 million. The Calgary-based company must raise about $3 billion for Fort Hills, according to Andrew Potter, a UBS AG analyst in Calgary.
“One of the problems is how do you raise capital,” said First Asset’s Stephenson. “The smaller pieces are logical candidates for being taken out.”
“Longer-term, these assets are good,” said Francois Bourdon, who helps oversee about $14 billion as a senior portfolio manager at Fiera Capital Inc. in Montreal. “In the short run, the price of oil and the lack of available credit make these assets too expensive.
It might be quite some time for those heavy oil projects in Canada to be economically viable again. Much of the price of oil above $90 was pure speculation and that speculation is still in the process of deleveraging.
Recent speculation has now shifted to figuring which Canadian asset plays make the best takeover candidates, and in what timeframe. Gone is the talk of $200 and $300 oil. The new talk is $25 oil or even $10 oil.
Such talk is now getting as silly on the low side as it did on the high side just a few months back.
Mike “Mish” Shedlock
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