By Asjylyn Loder, Anthony Dipaola and Grant Smith
13 December, 2012
@ Bloomberg
Whether crude costs $60 a barrel or twice that amount, the U.S. is almost free of depending on imported energy and positioned to supplant Saudi Arabia as the world’s No. 1 producer of oil.
Even if U.S. benchmark West Texas Intermediate oil drops 30 percent from the current $86 a barrel, oil companies will boost production as new technologies allow them to extract crude from shale formations, said Ed Morse, the global head of commodities research at Citigroup Inc. The nation, which was last self- sufficient when Harry S. Truman was president in 1952, met 83 percent of its energy needs in the first eight months of this year, according to the Energy Department in Washington.
Saudi Arabia can’t afford a decline of that magnitude after the government pledged an unprecedented $630 billion on social welfare and building projects. The kingdom, which uses Brent crude to help set export rates, couldn’t meet those commitments if prices fell 25 percent from the current $108 a barrel, according to Samuel Ciszuk, an oil consultant at KBC Energy Economics in Walton-on-Thames, England.
“U.S. shale oil producers can’t lose,” Leo Drollas, the chief economist at the London-based Centre for Global Energy Studies, which was founded by Saudi Arabia’s former oil minister, said in a Dec. 10 telephone interview. “The Saudis really need to balance their budget at about $95. For the U.S. producers, that is more than ample.”
New Deposits
U.S. average daily output will climb 14 percent this year, the most in six decades, according to the Energy Department, as Anadarko Petroleum Corp. and Chesapeake Energy Corp. exploit new deposits from North Dakota to Texas. Even though America’s 6.8 million barrels a day in November was 30 percent less than Saudi Arabia’s 9.7 million, the International Energy Agency says the U.S. will be bigger by 2020.
West Texas Intermediate, or WTI, will rise about 15 percent through 2015, to $100 a barrel, according to the median of 13 analyst estimates compiled by Bloomberg. Brent, the benchmark for Arab Light and Arab Medium grades, may gain less than 1 percent, to $110, the forecasts show.
WTI slipped 88 cents, or 1 percent, to settle at $85.89 a barrel today on the New York Mercantile Exchange. Brent for January settlement on the London-based ICE Futures Europe exchange fell $1.59, or 1.5 percent, to $107.91 a barrel. The Organization of the Petroleum Exporting Countries yesterday kept its official production ceiling at 30 million barrels a day.
Abdullah’s Pledge
While Morse says U.S. producers break even with prices of about $72 to $75 a barrel, and will keep drilling new shale wells at $60 because they’ve already hedged future output, Saudi Arabia faces different challenges.
Last year, as popular uprisings toppled leaders in Tunisia, Libya and Egypt and sparked a civil war in Syria, Saudi King Abdullah promised to spend $130 billion on extra subsidies for housing and benefits as well as $500 billion for previously announced infrastructure projects.
The kingdom’s population of 28.4 million is growing 2.9 percent a year, according to the Central Department of Statistics and Information. At current rates, it will need all its own oil by 2032, leaving nothing to export, Citigroup said in a Sept. 4 report. The country uses about 25 percent of its fuel production domestically, more per capita than any other industrialized nation, the report said.
Fuel Misuse
Waste and misuse of fossil fuels threaten to double consumption by 2030, Saudi Oil Minister Ali al-Naimi said in a Nov. 24 speech in Riyadh. The kingdom consumes an average of 2.5 barrels of oil and oil equivalents to produce $1,000 of national income, twice the global average, he said.
“The Saudis are trying to do two things: they want to keep prices from going too high to hurt economic activity and at the same time not let oil go below $100 a barrel,” Ciszuk, the KBC Energy consultant said in a telephone interview Dec. 5. “I would struggle to see the Saudis willing or able to take oil prices low enough to cut off U.S. shale developments since even they need oil in the $80s to balance the government budget through 2013 and 2014.”
For all the growth in U.S. production, Al-Naimi told reporters at yesterday’s OPEC meeting he isn’t concerned by the burgeoning output from shale deposits, while United Arab Emirates Oil Minister Mohammed Al-Hamli said producers are “very concerned” and will protect their interests.
Global Sway
Saudi Arabia, OPEC’s biggest member, can still sway global markets more than other nations. It has spare capacity to pump as much as 12.5 million barrels a day, or 29 percent more than last month’s levels, which were the lowest in 13 months, according to an OPEC report this week. The country supplies more than 10 percent of the world’s oil.
“The U.S. will never be the new Saudi Arabia,” said Mike Wittner, Societe Generale’s New York-based head of oil market research for the Americas. “The Saudis are able to increase production when they want to and are willing to cut when they need to, and the U.S. will never do either of those things.”
U.S. stockpiles have grown 13 percent in 2012 as production climbed to nearly a 19-year high, according to the Energy Department. The rise in reserves is one reason why the average regular unleaded gasoline price has tumbled from this year’s high of $3.936 a gallon, according to data compiled by AAA. The current price of $3.315 is 1.1 percent higher than the start of the year.
Shrinking Spread
Analysts estimate WTI will rise more than Brent in coming years partly because of the way oil pipelines flow in the U.S., bringing crude to the nation’s storage hub and delivery point for Nymex futures contracts in Cushing, Oklahoma. The American grade has traded at an average discount of about $17 a barrel this year, compared with a premium of about 95 cents in the 10 years through 2010.
Brent has also been buoyed by U.S. and European sanctions on Iran, which choked off about 1 million barrels a day, or 1.1 percent of the global total, according to data compiled by Bloomberg. The Buzzard field in the North Sea, which pumps 200,000 barrels a day, was shut for two months for maintenance.
The price gap will narrow to as little as $4.50 next year, as the glut in Cushing eases, according to Goldman Sachs Group Inc. The Seaway pipeline, operated by Enbridge Inc. and Enterprise Products Partners LP, will be able to send 400,000 barrels a day from Cushing to the Houston area starting Jan. 1, compared with 150,000 a day now, Enterprise Chief Executive Officer Mike Creel said on Nov. 13.
Big Short
The last time the U.S. rivaled Saudi Arabia proved a disaster for America’s oil industry and for the kingdom. U.S. production expanded 10 percent from 1976 to 1985, reaching the highest level since the Arab embargo in 1973.
By late 1985, the Saudis were pumping more crude to defend their market dominance. WTI plunged to $10 a barrel in March 1986. U.S. output declined for 21 of the next 22 years and didn’t start growing again until 2009.
Now, the U.S. may be producing too much oil and WTI may drop as low as $50 a barrel within the next two years unless policy makers scrap a law limiting exports, Francisco Blanch, the head of commodities research for Bank of America Merrill Lynch in New York, said in an interview.
“WTI is our big short for next year,” Blanch said. Should futures fall to between $50 and $65 a barrel, production gains will slow, he said.
If the U.S. natural gas market is any guide, declining prices don’t guarantee reduced supply. Gas dropped to a 10-year- low of $1.902 per million British thermal units in April. New production technology helped drive inventories to a record last month even though the number of gas rigs operating in the country fell to a 13-year low on Nov. 9, according to Houston- based Baker Hughes Inc.
“What’s going on with U.S. oil is the biggest development over the last 40 years,” Eugen Weinberg, head of commodities research at Commerzbank AG in Frankfurt, said in a telephone interview. “U.S. shale, rather than anything, is the game changer. OPEC nations are concerned, all of them.”
To contact the reporters on this story: Asjylyn Loder in New York at aloder@bloomberg.net; Anthony DiPaola in Dubai at adipaola@bloomberg.net; Grant Smith in London at gsmith52@bloomberg.net
To contact the editors responsible for this story: Dan Stets at dstets@bloomberg.net; Stephen Voss at sev@bloomberg.net
®2012 BLOOMBERG L.P. ALL RIGHTS RESERVED.