Syed Rashid Husain A new market equilibrium is finally on horizon! In his ‘first public comments' since December, Saudi Oil Minister Ali Al-Naimi insisted last Wednesday that the oil market had become “calm”, chiding those who would rock the markets. “Why do you want to rock the markets? The markets are calm… demand is growing,” Naimi told reporters on the sidelines of a conference in Jazan. Many took this as a cue that Riyadh was satisfied with the current state of the oil markets and that Saudi Arabia has won the first round of the ongoing tussle for market share. A day earlier, a senior Gulf OPEC delegate too had conceded that oil prices had started to stabilize around current levels - effectively dropping a price anchor at $60 a barrel. The comments came as Brent markets continued to hover at around $60 a barrel and the demand scenario is beginning to look healthier. Several reports last week underlined growing oil demand, a WSJ report said. Energy Aspects, a research consultancy, estimated that global demand for crude reached a record high of 94 million barrels a day in December. This was growth at its quickest pace in 18 months, representing a year-on-year growth of 2.2 million barrels a day. The report projected the trend to continue throughout the year forecasting 1 million barrels a day growth in 2015. On the retail side, cheaper crude seems to be aiding gasoline demand, said JBC Energy. Gasoline demand in the US alone grew by almost 500,000 barrels a day in January. While this is likely due to drivers reaping the rewards of cheaper pump prices, JBC said the current pricing environment is also beginning to shape longer-term driving habits. According to Autodata, sales of light trucks and SUVs grew by 19.3% over the year in January, representing 54% of the sales mix, while passenger cars grew at a more modest 7.7%. With US drillers idling rigs at a record pace, gutting investment plans and laying off thousands of workers, the rebound is vindicating the Saudi insistence on OPEC not to cut output at its November 27 meeting, many are now asserting. “OPEC giving up on trying to control the price is working,” Francisco Blanch, head of commodities research at Bank of America Corp. in New York told Bloomberg. “It is having the effect that we would expect, which is a decline in investment and ultimately supply, and somewhat higher demand.” “The Saudis are saying – look, everything is happening the way it needs to happen. Others are cutting capex, production growth is slowing and low prices are stimulating demand,” Yasser Elguindi from Medley Global Advisors told Reuters. The US Energy Information Administration reduced its 2015 US crude production forecast to 9.3 million barrels a day in February from 9.42 million in November. The EIA projects output will fall in the third quarter for the first time in four years. “OPEC's long-game strategy is on track,” Harry Tchilinguirian, head of commodity markets strategy at BNP Paribas SA told Bloomberg. “It's suffering short-term financial pain for long-term gain.” “After the OPEC (November) meeting... we had the oil ministers of Saudi Arabia, Kuwait and the UAE going to the newswires to talk the market down. They did like to talk oil then and (Naimi's current remarks) is probably another indication that they have reached their objective,” Olivier Jakob from Petromatrix consultancy was quoted as saying. He, however, added that another big unknown was the ongoing nuclear talks between the West and Iran, which could lead to a softening of sanctions against Tehran and a potential release of as much as 1 million barrels per day of additional oil to the market. “Any nuclear deal will reopen the gates of speculation about the role of OPEC and its place in the current oil market,” Jakob emphasized. Shale oil producers are feeling threatened. They are throttling back so quickly on drilling that US crude output could fall sooner than expected, within months, industry executives are beginning to feel. Industry executives are acknowledging they were taken aback by the scale and speed of the cutbacks, noting how this oil price downturn was different from several previous episodes in their careers. “The thing that has surprised me ... is that companies large and small, financially strong, financially weak have really cut capital spending much quicker than I have seen before,” Bruce Vincent, who retired as CEO of Swift Energy Co this month after 40 years in the industry told Reuters. Just few weeks ago, the prevailing view among industry insiders and analysts was that US oil production would keep rising for several months despite falling rig numbers because of rising productivity of active wells and drilling inertia. In the past, if a producer had a rig contract, they would continue drilling. Now, producers are paying fees to break those contracts, a fact that has hastened the steep drop in the rig count, said Vincent. Already, many companies have announced 25-70 percent reductions in drilling and a total of at least $25 billion in spending cuts. Magnum Hunter Resources Corp has halted all drilling and told services firms it will not resume work unless its costs fall 40 percent, the company's Chief Executive Gary Evans told a conference in Houston. Such pullback, combined with shale well decline rates of some 60 percent or more a year, has Evans predicting US production will begin falling “in the next two months.” On its fourth-quarter earnings call, Devon Energy Corp. said it had cut its completion crews working in the Eagle Ford oil basin to four from nine, while Anadarko Petroleum said it reduced its completion crews by a third. After years of breakneck growth, top shale companies Apache Corp and EOG Resources have said their oil and gas output this year will be flat. Large oil firms too have announced cuts in capital spending of over 20% for this year. BP, for example, will spend $20 billion in capital projects in 2015, compared with $23 billion in 2014. Producers who had grown accustomed to oil at $100 a barrel say they aim to cut costs to profitably drill shale wells at $40 a barrel or less. That is well below the $70 now needed to work in some basins and less than current US benchmark crude prices of about $51 a barrel. Assuming that many drilling contracts will be carried out, the US Energy Information Administration (EIA) still sees output climbing early this year to peak at 9.42 million barrels per day in May, with a decline starting in June. After nearly doubling since 2008, US crude production should stabilize, though not necessarily decline, in the second half of this year, analysts at IHS say. New discoveries too are down even more steeply. According to IHS, new finds of oil and gas were the equivalent of 16 billion barrels last year, the lowest for 60 years. Markets are closing on a new demand - supply equilibrium. OPEC can boast of an upper hand in this round, one can't deny. And although professionally hazardous - yet one could now say with some conviction - crude market prices could well stabilize somewhere around the current level.
