Market Observer | 近期油价下跌

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Oil Prices Fall, and the Global Economy Wins

October 02, 2014

The refinery at Shaybah Oil Field in Saudi Arabia

Photograph by George Steinmetz/Corbis

The refinery at Shaybah Oil Field in Saudi Arabia

An earlier version of this story appeared online.

Oil is in the middle of one of its steepest selloffs since the financial crisis, with prices on the international market falling 18 percent since mid-June, to $94 a barrel on Sept. 30. There are two explanations—not enough demand or too much supply. Supporting the weak demand argument: a stagnant economy in Europe, slower growth in China, and flat gasoline consumption in the U.S. According to the International Energy Agency, in 2014 world demand for oil will grow only 1.5 percent.

But the bigger factor appears to be surging global oil production, which outpaced demand last year and is shaping up to do so again in 2014. To try to keep prices high, Saudi Arabia, the world’s biggest petroleum exporter, has reduced its oil production from 10 million barrels a day—a record high—in September 2013 to 9.6 million as of Sept. 30. That hasn’t done much to raise prices, mostly because other OPEC countries are pumping more crude as the Saudis try to slow down. Sharply higher production increases from Libya and Angola, along with surprisingly steady flows out of war-torn Iraq, have pushed OPEC’s total output to almost 31 million barrels a day, its highest level this year and 352,000 barrels a day higher than last September. Combined with the continued increase in U.S. oil production, the world has more than enough oil to satisfy current demand. “I would definitely give the edge to thesupply story at the moment,” says John Kilduff, a partner at Again Capital, a hedge fund in New York that focuses on energy.

“That money is going to be moving into cash registers this fall. … This couldn’t have come at a better time.”—David Rosenberg, Gluskin Sheff

Although that might not be good news for oil producers, it’s great for consumers and the global economy. A report by Andrew Kenningham, senior global economist at Capital Economics, attempts to gauge the difficult-to-measure global lift from lower oil prices. “A $10 fall in the price of oil transfers the equivalent of 0.5 percent of world GDP from oil producers to oil consumers,” he writes. That in turn will have a knock-on effect on global consumption, because consumers tend to spend more of their income than businesses. Assuming consumers spend half their savings from cheaper oil, Kenningham continues, “a $10 fall in the oil price would boost global demand [for goods and services] by 0.2 to 0.3 percent.”

By lowering gasoline bills, cheaper oil prices could potentially increase purchasing power for U.S. consumers in time for the holiday sales season. “That money is going to be moving into cash registers this fall,” says David Rosenberg, chief economist at Canadian investment firm Gluskin Sheff (GS:CN). “Cheap gasoline acts like a tax cut that will flow through the U.S. economy in a big way. This couldn’t have come at a better time.”

Cheaper oil, though, means different things for different parts of the world. In Europe, where policymakers are struggling with deflation, lower oil prices will only make the European Central Bank’s challenge harder as it loosens monetary policy to try to raise consumer prices. Abundant oil also might not be good news for some big petro states. Kenningham says Russia and most of the Middle East can weather lower prices because they socked away enough oil revenue, but countries such as Brazil, Mexico, and Venezuela will be more negatively affected “primarily because they have not been saving much of their oil windfalls.”

American consumers shouldn’t consider their savings a windfall quite yet. For one, they’re driving fewer miles than they used to and doing so in more fuel-efficient vehicles, reducing the impact gas prices have on their overall spending. Through the end of September the average price for a gallon of regular gas in the U.S. was $3.51; that’s only 5¢ cheaper than during the same period in 2013. “When you think about the impact compared to last year, it’s a rounding error,” says Jacob Oubina, senior U.S. economist at RBC Capital Markets (RY). “Gasoline will have to keep getting cheaper before you can start the conversation about this being a big positive for the U.S. consumer.”


Why Are Oil Prices Dropping?


Habib Al Mulla
Mr. Habib is the founder and executive chairman of the UAE law firm Habib Al Mulla.
With the price of oil down 28 percent in recent months, financial analysts and political pundits are all asking the same questions: What are the reasons behind this drop and why isn’t OPEC taking steps to stop the bleeding?

It’s Economics 101. When the price falls, you cut supply. OPEC nations are amongst the world’s top oil exporters. It’s certainly within their capability. If there was even a hint they would slow production, prices would certainly jump from current lows of about $82 a barrel.

According to recent estimates, Saudi Arabia needs the price at $99.20 to break even. Even at that point, many OPEC nations would still be in the red. So why is OPEC sitting on its hands?

Theories why oil prices are so low

A number of theories have emerged. OPEC itself posits that the declines are due largely to speculation in the market and that demand isn’t as low as many may think. Others contend that increased competition—in the form of increased U.S. shale oil production—provides incentives for OPEC to keep prices down. However, some studies suggest that oil prices have to fall to $60 or even lower to halt shale production growth.

Both would explain the recent move by U.S. driller Continental Resources Inc. to monetize its hedges in the oil market. Not only does it show great confidence that demand will recover; it also provides Continental with added liquidity ahead of a potential price war with OPEC.

Some argue that Saudi Arabia, the world’s largest producer, is defending its market share by cutting prices rather than production. Others would go so far as to say that Saudi Arabia is pushing prices down to hit its regional rival, Iran, where it hurts most; the economy. Some estimate that Iran needs oil at $136 a barrel to finance its growing spending plans.

The problem with all of these theories is that they do not provide an explanation for the relatively short period in which prices have fallen, particularly if one accounts for continued economic growth in the U.S. and the UK.

A way to combat the Islamic State?

Perhaps that is why yet another theory is making the rounds—and it may be the most interesting of all; not because of its validity, but because of the important geopolitical questions it raises. Could OPEC be keeping prices down to combat the Islamic State? There is no question that the best funded terrorist organization ever relies heavily on seized energy assets to support a burgeoning population and intensifying war effort. Why wouldn’t the OPEC nations at IS’s doorstep do everything in their power to slow its flow of revenue and stop its murderous rampage?

Because, when it comes to oil prices, IS profits either way.

Consider that the OPEC nations in the Middle East and North Africa are universally confronting massive budget cuts due to shortfalls in oil profits. Now, consider the programs those cuts will most acutely impact: Welfare programs. Even rich Gulf Oil exporters face inevitable cuts. Look at the recent statement issued by the Kuwaiti Finance Minister. Kuwait has already revealed plans to slash costly subsidies on diesel, kerosene, and jet fuel. Electricity and water subsidies may also come under scrutiny.

Budget cuts and the risk of losing popular support

Whenever welfare programs are cut, oil producing nations run the risk of eroding the popular support their governments enjoy. In other words, falling oil prices are a boon for IS recruiting and networking. With little aid from their governments, how many more marginalized and disaffected Sunnis will pour into IS-controlled territory, become militarized, and join the fight for the Caliphate? With fewer resources to prevent domestic strife in OPEC nations, how many radical groups throughout the region will be emboldened to work with IS, or alongside it?
Worst of all: When prices do rise again—perhaps because of the very disorder and turmoil created while prices were low—IS will be better positioned to fund its growing territory and influence. It’s a win-win for IS and a loss-loss for the world, no matter how you slice it.

If oil price manipulation is indeed an element of regional strategy to combat IS, then OPEC nations on the front lines need to rethink their approach. While we all share the burden of lost revenue, IS alone reaps a significant benefit. Increased radicalization and destabilization are precisely what IS wants. When the impacts of falling oil prices hit home, we’ll be handing them over on a silver platter.


The Economist explains

Why the oil price is falling

THE oil price has fallen by more than 40% since June, when it was $115 a barrel. It is now below $70. This comes after nearly five years of stability. At a meeting in Vienna on November 27th the Organisation of Petroleum Exporting Countries, which controls nearly 40% of the world market, failed to reach agreement on production curbs, sending the price tumbling. Also hard hit are oil-exporting countries such as Russia (where the rouble has hit record lows), Nigeria, Iran and Venezuela. Why is the price of oil falling?

The oil price is partly determined by actual supply and demand, and partly by expectation. Demand for energy is closely related to economic activity. It also spikes in the winter in the northern hemisphere, and during summers in countries which use air conditioning. Supply can be affected by weather (which prevents tankers loading) and by geopolitical upsets. If producers think the price is staying high, they invest, which after a lag boosts supply. Similarly, low prices lead to an investment drought. OPEC’s decisions shape expectations: if it curbs supply sharply, it can send prices spiking. Saudi Arabia produces nearly 10m barrels a day—a third of the OPEC total.

Four things are now affecting the picture. Demand is low because of weak economic activity, increased efficiency, and a growing switch away from oil to other fuels. Second, turmoil in Iraq and Libya—two big oil producers with nearly 4m barrels a day combined—has not affected their output. The market is more sanguine about geopolitical risk. Thirdly, America has become the world’s largest oil producer. Though it does not export crude oil, it now imports much less, creating a lot of spare supply. Finally, the Saudis and their Gulf allies have decided not to sacrifice their own market share to restore the price. They could curb production sharply, but the main benefits would go to countries they detest such as Iran and Russia. Saudi Arabia can tolerate lower oil prices quite easily. It has $900 billion in reserves. Its own oil costs very little (around $5-6 per barrel) to get out of the ground.

The main effect of this is on the riskiest and most vulnerable bits of the oil industry. These include American frackers who have borrowed heavily on the expectation of continuing high prices. They also include Western oil companies with high-cost projects involving drilling in deep water or in the Arctic, or dealing with maturing and increasingly expensive fields such as the North Sea. But the greatest pain is in countries where the regimes are dependent on a high oil price to pay for costly foreign adventures and expensive social programmes. These include Russia (which is already hit by Western sanctions following its meddling in Ukraine) and Iran (which is paying to keep the Assad regime afloat in Syria). Optimists think economic pain may make these countries more amenable to international pressure. Pessimists fear that when cornered, they may lash out in desperation.

Dig deeper:
The economics of oil have changed (Dec 2014)
Will falling oil prices curb America’s shale boom? (Dec 2014)
What is the oil cartel up to? (Dec 2014)


Oil price drops: Don’t panic, really

Oil prices have a lot more room to fall before things get really scary. Here’s why.

The recent drop in crude prices won’t kill off the US shale oil industry. It’ll just make it more efficient.

Profit margins and break-even points are relative not only to the price of oil, but also to the cost of doing business. As oil prices drop, producers will undoubtedly renegotiate their ludicrously expensive oil service contracts, slash wages for their workforce and cut perks to bring their costs in line with the depressed price for crude. The demand for oil remains strong, which should provide an adequate floor for producers in the long run, but only after they get their finances in order.

How oil prices ever reached $100 a barrel still remains a mystery to many who have followed the industry for years. But the 40% drop in oil prices over the past six months has been shocking for oil bears and bulls alike. Why on earth did it fall so hard, so fast? There is plenty of speculation, ranging from the Saudi’s wish to “crush” the U.S. shale industry, to the U.S. colluding with the Saudi’s to flood the market in order to bankrupt an aggressive Russia and an obstinate Iran.

Conspiracy theories aside, the fact is oil prices have dropped and they may stay “low” for a while. This has analysts, journalists, and pundits running around claiming that it’s the end of the world.

It is understandable that people are nervous. After all, the oil industry is a major producer of jobs and wealth for the U.S. It contributes around $1.2 trillion to U.S. GDP and supports over 9.3 million permanent jobs, according to a study from The Perryman Group. Not all that money and jobs come directly from the shale oil industry or even the energy industry as a whole but instead derive from the multiplier effect the industry has on local economies. Given this, it’s clear why any drop in the oil price, let alone a 40% drop, is cause for concern.

Nowhere in the U.S. is that concern felt more acutely than in Houston, Texas, the nation’s oil capital. The falling price of crude hasn’t had a major impact on the city’s economy, at least not yet. But people, especially the under-40 crowd—the Shale Boomers, as I call them—are starting to grow very worried. At bars and restaurants in Houston’s newly gentrified East End and Midtown districts, you often hear the young bucks (and does) comparing notes on their company’s break-even points with respect to oil prices. Those who work for producers with large acreage in the Bakken shale in North Dakota are saying West Texas Intermediate (WTI) crude needs to stay above $60 a barrel for their companies to stay in the black. Those who work for producers with large acreage in the Eagleford shale play in south Texas say their companies can stay above water with oil as low as $45 to $50 a barrel.

Both groups say that they have heard their companies are starting to walk away from some of the more “speculative” parts of their fields, which translates to a decrease in production, the first such decrease in years. This was confirmed Wednesday when the Fed’s Beige Book noted that oil and gas activity in North Dakota decreased in early November due to the rapid fall in oil prices. Nevertheless, the Fed added the outlook from “officials” in North Dakota “remained optimistic,” and that they expect oil production to continue to increase over the next two years.

What are these “officials,” thinking? Don’t they worry about the break-even price of oil? Sure they do, but unlike the Shale Boomers, they also probably remember drilling for oil when it traded in the single digits, which really wasn’t that long ago. For these seasoned oil men, crude at $60 a barrel still looks mighty appealing.

Doug Sheridan, the founder of EnergyPoint Research, which conducts satisfaction surveys, ratings, and reports for the energy industry, recalls when he had lunch with an oil executive of a major energy giant 10 years ago who confided in him that his firm was worried that oil prices had risen too high, too fast. “He was concerned that the high prices would attract negative attention from the press and Congress,” Sheridan toldFortune. “The funny thing was, oil prices were only around $33 a barrel.”

The shale boom has perpetuated the notion that drilling for oil, especially in shale formations, is somehow super complicated and expensive. It really isn’t. Fracking a well involves just shooting a bunch of water and chemicals down a hole at high pressure—not exactly rocket science. The drilling technique has been around since the 1940s, and the energy industry has gotten very good at doing it over the decades. Recent advances in technology, such as horizontal drilling, have made fracking wells even easier and more efficient.

But even though drilling for oil has become easier and more efficient, production costs have gone through the roof. Why? There are a few reasons for this, but the main one is the high price of oil. When oil service firms like Halliburton and Schlumberger negotiate contracts with producers, they usually take the oil price into consideration. The higher the oil price, the higher the cost for their services. This, combined with the boom in cheap credit over the last few years, has increased demand for everything related to the oil service sector—from men to material to housing. In what other industry do you know where someone without a college degree can start out making six figures for doing manual labor? You can in the oil and gas sectors, especially in places like Western North Dakota. There, McDonald’s employees make $20 an hour and rent for a modest place can top $2,000 a month.

But as the oil price drops, so will costs, bringing the “break-even” price down with it. Seasoned oil men know how to get this done—it involves a little Texas theater, which is sort of like bargaining at a Turkish bazaar. The producers will first clutch their hearts and tell their suppliers that they simply cannot afford to drill any more given the sharp slump in oil prices. Their suppliers will offer a slight discount on their services but the producer will say he’s “walking away.” This is where we are in the negotiating cycle.

After letting the oil service firms sweat a bit (traditionally around two to four months), a producer will give their former suppliers a call, saying they are “thinking” of getting back in the game. Desperate for work, the suppliers will now be willing to renegotiate a whole new agreement based on a lower oil price. The aim of the new contract is to give producers close to the same margin they had when prices were much higher. Profits are restored and everyone is happy.

This negotiation will happen across all parts of the oil and gas cost structure. So welders who were making $135,000 a year will probably see a pay cut, while the administrative staff back at headquarters will probably miss out on that fat bonus check they have come to rely on. Rig workers and engineers will see their pay and benefits slashed as well. Anyone who complains will be sent to Alaska or somewhere even worse than Western North Dakota in the winter, like Siberia (seriously). And as with any bursting bubble, asset prices will start to fall for everything from oil leases to jack-up rigs to townhouses in Houston. Oh, and that McDonald’s employee in Western North Dakota will probably need to settle for $15 an hour.

But oil production will continue, that is, until prices reach a point at which it truly makes no sense for anyone to drill anywhere.

So, what is the absolute lowest price oil can be produced for in the U.S.? Consider this—fracking last boomed in the U.S. back in the mid-1980s, when a barrel of oil fetched around $23. That is equivalent to around $50 a barrel today, when adjusted for inflation. That fracking boom went bust after prices fell to around $8 a barrel, which is worth around $18 in today’s money. With oil last week hitting $63 a barrel, it seems that prices have a lot more room to fall before things get really scary.

————————- ————————-

Falling oil prices: Who are the winners and losers?

A woman walks past a board listing foreign currency rates against the Russian ruble in central MoscowA woman walks past a board listing currency exchange rates in Moscow

Global oil prices have fallen sharply over the past seven months, leading to significant revenue shortfalls in many energy exporting nations, while consumers in many importing countries are likely to have to pay less to heat their homes or drive their cars.

From 2010 until mid-2014, world oil prices had been fairly stable, at around $110 a barrel. But since June prices have more than halved.Brent crude oil has now dipped below $50 a barrel for the first time since May 2009 and US crude is down to below $48 a barrel.

The reasons for this change are twofold – weak demand in many countries due to insipid economic growth, coupled with surging US production.

Added to this is the fact that the oil cartel Opec is determined not to cut production as a way to prop up prices.

So who are some of the winners and losers?


Russia: Propping up the rouble

Vladimir PutinThe falling rouble and plunging oil revenue are some of President Putin’s biggest challenges

Russia is one of the world’s largest oil producers, and its dramatic interest rate hike to 17% in support of its troubled rouble underscores how heavily its economy depends on energy revenues, with oil and gas accounting for 70% of export incomes.

US Dollar v Russian Rouble


$1 buys change %
66.3520 +



Russia loses about $2bn in revenues for every dollar fall in the oil price, and the World Bank has warned that Russia’s economy would shrink by at least 0.7% in 2015 if oil prices do not recover.

Despite this, Russia has confirmed it will not cut production to shore up oil prices.

“If we cut, the importer countries will increase their production and this will mean a loss of our niche market,” said Energy Minister Alexander Novak.

Falling oil prices, coupled with western sanctions over Russia’s support for separatists in eastern Ukraine have hit the country hard.

The government has cut its growth forecast for 2015, predicting that the economy will sink into recession.

Former finance minister, Alexei Kudrin, said the currency’s fall was not just a reaction to lower oil prices and western sanctions, “but also [a show of] distrust to the economic policies of the government”.

Given the pressures facing Moscow now, some economists expect further measures to shore up the currency.

“We think capital controls as a policy measure cannot be off the table now,” said Luis Costa, a senior analyst at Citi.

Pedestrians walk past a board listing foreign currency rates against the Russian rouble outside an exchange office in Moscow on December 3, 2014Russia’s economy is forecast to fall into recession in 2015 if oil prices do not regain ground

While President Putin is not using the word “crisis”, Prime Minister Dmitry Medvedev has been more forthright on Russia’s economic problems.

“Frankly, we, strictly speaking, have not fully recovered from the crisis of 2008,” he said in a recent interview.

Because of the twin impact of falling oil prices and sanctions, he said the government had had to cut spending. “We had to abandon a number of programmes and make certain sacrifices.”

Russia’s interest rate rise may also bring its own problems, as high rates can choke economic growth by making it harder for businesses to borrow and spend.


Venezuela: No subsidy cuts

A policeman kicks away a tear gas canister in Caracas, May 2014Venezuela saw mass anti-government protests earlier this year

Venezuela is one of the world’s largest oil exporters, but thanks to economic mismanagement it was already finding it difficult to pay its way even before the oil price started falling.

Inflation is running at about 60% and the economy is teetering on the brink of recession. The need for spending cuts is clear, but the government faces difficult choices.

The country already has some of the world’s cheapest petrol prices – fuel subsidies cost Caracas about $12.5bn a year – but President Maduro has ruled out subsidy cuts and higher petrol prices.

“I’ve considered as head of state, that the moment has not arrived,” he said. “There’s no rush, we’re not going to throw more gasoline on the fire that already exists with speculation and induced inflation.”

The government’s caution is understandable. A petrol price rise in 1989 saw widespread riots that left hundreds dead.


Saudi Arabia: Price versus market share

The skyline of Riyadh, Saudi ArabiaSaudi Arabia is not expected to cut production to prop up oil prices in the short term

Saudi Arabia, the world’s largest oil exporter and Opec’s most influential member, could support global oil prices by cutting back its own production, but there is little sign it wants to do this.

There could be two reasons – to try to instil some discipline among fellow Opec oil producers, and perhaps to put the US’s burgeoning shale oil and gas industry under pressure.

Although Saudi Arabia needs oil prices to be around $85 in the longer term, it has deep pockets with a reserve fund of some $700bn – so can withstand lower prices for some time.

“In terms of production and pricing of oil by Middle East producers, they are beginning to recognise the challenge of US production,” says Robin Mills, Manaar Energy’s head of consulting.

If a period of lower prices were to force some higher cost producers to shut down, then Riyadh might hope to pick up market share in the longer run.

However, there is also recent history behind Riyadh’s unwillingness to cut production. In the 1980s the country did cut production significantly in a bid to boost prices, but it had little effect and it also badly affected the Saudi economy.


Opec: Not all are equal

oil refinery, Saudi ArabiaSome Opec members need oil to be above $120 a barrel to avoid hard spending choices

Alongside Saudi Arabia, Gulf producers such as the United Arab Emirates and Kuwait have also amassed considerable foreign currency reserves, which means that they could run deficits for several years if necessary.

Other Opec members such as Iran, Iraq and Nigeria, with greater domestic budgetary demands because of their large population sizes in relation to their oil revenues, have less room for manoeuvre.

Oil price budget balance graph

They have combined foreign currency reserves of less than $200bn, and are already under pressure from increased US competition.

Nigeria, which is Africa’s biggest oil producer, has seen growth in the rest of its economy but despite this it remains heavily oil-dependent. Energy sales account for up to 80% of all government revenue and more than 90% of the country’s exports.

The war in Syria and Iraq has also seen Isis, or Islamic State, capturing oil wells. It is estimated it is making about $3m a day through black market sales – and undercutting market prices by selling at a significant discount – around $30-60 a barrel.


United States: Fracking boom

Pumps in a California oil field over the Monterey Shale formation where gas and oil extraction using hydraulic fracturing, or fracking, is on the verge of a boomUS domestic oil production has boomed due to fracking

“The growth of oil production in North America, particularly in the US, has been staggering,” says Columbia University’s Jason Bordoff.

Speaking to BBC World Service’s World Business Report, he said that US oil production levels were at their highest in almost 30 years.

It has been this growth in US energy production, where gas and oil is extracted from shale formations using hydraulic fracturing or fracking, that has been one of the main drivers of lower oil prices.

“Shale has essentially severed the linkage between geopolitical turmoil in the Middle East, and oil price and equities,” says Seth Kleinman, head of energy strategy at Citi.

Even though many US shale oil producers have far higher costs than conventional rivals, many need to carry on pumping to generate at least some revenue stream to pay off debts and other costs.


Europe and Asia: Mixed blessings

EU flagsGrowth in the European Union remains weak

With Europe’s flagging economies characterised by low inflation and weak growth, any benefits of lower prices would be welcomed by beleaguered governments.

A 10% fall in oil prices should lead to a 0.1% increase in economic output, say some. In general consumers benefit through lower energy prices, but eventually low oil prices do erode the conditions that brought them about.

China, which is set to become the largest net importer of oil, should gain from falling prices. However, lower oil prices won’t fully offset the far wider effects of a slowing economy.

Japan imports nearly all of the oil it uses. But lower prices are a mixed blessing because high energy prices had helped to push inflation higher, which has been a key part of Japanese Prime Minister Shinzo Abe’s growth strategy to combat deflation.

India imports 75% of its oil, and analysts say falling oil prices will ease its current account deficit. At the same time, the cost of India’s fuel subsidies could fall by $2.5bn this year – but only if oil prices stay low.

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