Page 7 - NorthAmOil Week 12

NorthAmOil COMMENTARY NorthAmOil
“In a nutshell, Saudi Aramco can sustain the verylowpriceandcansustainitforalongtime,” CEO Amin Nasser said in an earnings call on March 16.
While it was Russia’s actions that provoked Saudi Arabia to cut its prices, the kingdom’s main target is higher-cost US shale. US shale oil costs $23.35 per barrel, while non-shale oil costs $20.99, according to the US Energy Information Administration (EIA). Russia, in comparison, extracts oil at a cost of $19.21 per barrel.
On the face of it, this would suggest that Saudi Arabia is best positioned for a poten- tially prolonged market downturn. However, it needs an oil price of around $80 per barrel for its state budget to break even. Russia, in con- trast, can balance the books with oil at only $42 per barrel. The difference is partly due to Saudi Arabia’s greater reliance on oil revenues, and partly thanks to efforts by Moscow since the 2014 oil price crash to cut spending and boost tax income.
On the other hand, Saudi Arabia has accumu- lated more than $500bn in net foreign assets over the years, helping to shield its public finances from weaker oil revenues.
Whether or not Russia or Saudi Arabia can withstand low oil prices for longer, US shale is certainly in a more precarious position. Chev- ron and ExxonMobil, which have both invested heavily in US shale in recent years, are expected to make dramatic cuts to expenditure. Canadian producers are in a similarly tough spot.
With oil demand in freefall as lockdowns are imposed across the world to slow the spread of the coronavirus, the losses from Russia and Saudi Arabia launching a war against their US
competitors at this stage may outweigh any potential gain, however.
Demand destruction
The US Energy Information Administration (EIA), the International Energy Agency (IEA) and OPEC have all revised down their oil demand forecasts for the year.
Both the EIA and IEA expect demand in the first quarter of this year to fall year on year – the first quarterly contraction in more than a dec- ade – with the former predicting a 910,000 barrel per day slide and the latter anticipating a 435,000 bpd contraction.
A major contributor to this drop comes from the world’s biggest crude importer, China, where COVID-19 originated.
Energy consultancy Wood Mackenzie said on March 23 that the country’s crude runs in Febru- ary had shrunk by 3.1mn bpd year on year on the back of weak demand and disruption caused by the pandemic. It projected that while the country might to take the opportunity to fill its strategic petroleum reserve (SPR) with oil, with stock fill- ing reaching 300,000 bpd by the end of 2020, it would so at half the rate seen in previous years.
“Since the last oil price crash in 2014, China has been accelerating its crude imports for stra- tegic and commercial storage from about 200mn barrels in 2014 to 900mn barrels in 2019,” Wood Mackenzie senior consultant Lei Sun said. Sun noted that total stores could rise to 1.15bn barrels this year, equivalent to 83 days of oil demand.
The consultancy said crude imports for refin- ing and storage were anticipated to amount to around 9.5mn bpd in 2020, down 5% from about 10mn bpd in 2019.
Saudi Arabia’s oil is much cheaper to produce than Russian and US supplies.
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