Saudi Arabia Can Hold Out Indefinitely

Ed Yardeni writes:

The ongoing freefall in the price of crude oil is unsettling investors. It dropped to $53.04 per barrel of Brent crude yesterday, the lowest since May 2009. It is down 54% from last year’s peak of $115.15 on June 19. The next significant support may be the December 24, 2008 low of $32.27.

At the end of last year, Saudi Arabia’s oil minister Ali al-Naimi said in the Middle East Economic Survey that the current prices of oil will persist over the long term and that oil prices will never go back to $100. He also told the FT, “It is not in the interest of OPEC producers to cut production, whatever the price, whether it is $20, $40, $50 or $60, it does not make sense.” According to him, if Saudi Arabia lowers its production “prices will rise again but the Russians, Brazilians and US shale oil producers will take market share from us.”

For Ali al-Naimi, with production costs at $4-$5 per barrel, the Gulf countries can hold indefinitely with oil at current prices or even if it fell to as low as $20 per barrel. In contrast, the production of shale oil in the US costs in a range between $50-$80 per barrel. “They will be injured before we fell any pain,” he declared...

The 12/15 FT reported: “Almost $1tn of spending on future oil projects is at risk after a brutal plunge in crude prices to nearly $60 a barrel, Goldman Sachs has warned. Any cancellation of these developments would deprive the world of 7.5m barrels a day of new output over the coming decade--or 8 per cent of current global oil demand. The findings suggest the supply glut that has sent prices tumbling could soon vanish as the oil majors delay big-ticket production projects--the lifeblood of future petrol supplies, heating fuels and chemicals.”..

It’s too soon to tell, but my hunch is that US crude oil production peaked at the end of last year and could fall rapidly in coming months. The US oil rig count peaked at 1,609 during the week of October 10 and fell to 1,482 through the week ending January 2.