Oil producers hoping OPEC will still bail them out as Saudi oil minister faces rivals today

HOUSTON – Now, Saudi Oil Minister Ali Al-Naimi will for the first time face the sufferers of his decision to keep oil pumps flowing despite a global glut: U.S. shale oil producers can not survive the worst price crash in years.

While soaring U.S. shale output due to the hydraulic fracturing revolution contributed to oversupply, many blame the 70-percent price collapse in the past Twenty months mainly on Naimi, viewed as the oil market’s most influential policymaker.

During his keynote on Tuesday at the annual IHS CERAWeek conference in Houston, Naimi is addressing U.S. wildcatters and executives who’re stuck in a zero sum game.

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Al Naimi: “they merely invite me inside a crisis.” He last attended in ’09 #ceraweek

– Yadullah Hussain (@Yad_FPEnergy) , 2016

 

Al Naimi: I believe I actually have a ‘peak oil’ T-shirt #CERAWeek

– Yadullah Hussain (@Yad_FPEnergy) February 23, 2016

 

“OPEC, instead of cutting production, they increased production, and that’s the predicament we’re in right now,” Bill Thomas, leader of EOG Resources Inc, among the largest U.S. shale oil producers, told an industry conference a week ago, referring to 2015.

It will be Naimi’s first public appearance in the usa since Saudi Arabia led the business of Petroleum Exporting Countries’ shock decision in November 2014 to help keep heavily pumping oil even though mounting oversupply was already sending prices into free-fall.

Naimi has said it was no attempt to target any specific countries or companies, merely an effort to safeguard the kingdom’s market share against fast-growing, higher-cost producers.

It just so happens that U.S. shale was the biggest new oil frontier in the world, with much higher costs than cheap Saudi crude that can be produced for some dollars a barrel.

“I’d much like to listen to it from him,” said Alex Mills, president of the Texas Alliance of Energy Producers. “It ought to be something of concern to the leaders in Texas and in Washington,” if actually his aim would be to push aside U.S. shale producers, Mills said.

Last week’s surprise agreement by Saudi Arabia, Qatar, Russia and Venezuela to freeze oil output at January levels – near record highs – didn’t offer much solace and the global benchmark Brent crude ended a few days lower at $33 a barrel and U.S. crude futures ended unchanged at just below $30.

Prices fell sharply on Tuesday after Iran, the primary hurdle to the production control in the zeal to recapture market share lost to sanctions, welcomed the program without commitment. Iraq was also non-committal.

Many U.S. industry executives realize that all is fair for each other, war and the oil market, but “the Saudis have probably overplayed their hand,” said Bruce Vincent, former president of Houston-based shale oil producer Swift Energy, which declared bankruptcy late last year.

A PAINFUL TIME

The fact that OPEC members are talking to each other provides a ray of hope, based on some industry figures, a sign the kingdom’s own fiscal pain could prompt it to alter tact and lead efforts to reach an offer. On Tuesday, Standard & Poor’s downgraded Saudi Arabia’s credit rating.

“The pain is at a threshold right now. People are now prepared to take a seat and talk about possible remedies to that pain,” Mills said.

Texas, where oil production has more than doubled in the last 5 years because of the Eagle Ford and Permian Basin fields, is feeling acute pain.

The state lost nearly 60,000 oil and gas jobs between November 2014 and November 2015, according to the Texas Alliance’s most recent data. Only 236 rigs continue to be actively drilling wells within the state, down from a lot more than 900 at the end of 2014, Baker Hughes data showed.

Financial distress among U.S. producers has deepened. More than 40 U.S. energy companies have declared bankruptcy since the start of 2015, with increased looming as lenders are set to cut the value of companies’ reserves, often used as collateral for credit.

Anadarko Petroleum Corp and rival ConocoPhillips both cut their dividends this month, unusual moves that showed financial stress.

THE TIGER HAS TEETH

The before Naimi spoke at CERAWeek, seven years ago, OPEC was slashing output to lift prices that sank to $40 a barrel amid the global economic crisis, and he railed against speculators who he blamed for the price plunge.

Few oil executives anticipated Naimi’s willingness to let prices collapse now.

Some of them, for example Harold Hamm, the main executive of Oklahoma-based Continental Resources, even called his bluff.

Shortly prior to the November 2014 OPEC meeting, Hamm cashed in Continental’s hedges, calling OPEC a “toothless tiger.”

In an investor call in August, Hamm said he expected OPEC to start cuts in September, adding, “we think that may be the first of numerous.” Those have yet to come.

A Continental spokeswoman declined to discuss whether Hamm would attend Naimi’s speech.

Continental shares have tumbled a lot more than 60 % throughout the downturn, cutting Hamm’s personal fortune by more than $10 billion since 2014.

While producers might be more cautious now than before, some are still betting that OPEC will bail them out.

EOG’s Thomas reckons prices will skyrocket as high as $80 a barrel in the second of the season – in part, he says, because OPEC will ultimately be forced to yield in the face of fiscal strains.

“The whole world is under stress,” he explained. “I don’t care who you are. The Saudis they are under stress.”
? Thomson Reuters 2016