Syed Rashid Husain Global crude horizon is in transition, passing through some major adjustments. The current crude glut, dampening oil futures and its consequences are under increasing focus - all around. With the US crude oil West Texas Intermediate contract trading in New York was at $43.87 US a barrel at the close on Friday and the contract price for December 2020 delivery hovering around $62.05 - these are hard times indeed - from a producers' view point - especially when coupled with rising public expenses. Yet, despite dwindling market prospects, non-OPEC output continues to increase. And there are reasons for it. Ambrose Evans-Pritchard, writing for The Telegraph insists that the US shale frackers are not as high-cost as was projected initially. They are mostly mid-cost. He underlines that experts at IHS think shale companies may be able to shave costs by 45 percent this year - not only by switching tactically to high-yielding wells. Advanced pad drilling techniques allow frackers to launch five or ten wells in different directions from the same site. Smart drill-bits with computer chips can seek out cracks in the rock. New dissolvable plugs promise to save $300,000 a well. “We've driven down drilling costs by 50 percent, and we can see another 30pc ahead,” John Hess, head of the Hess Corporation was quoted as saying. “We have just drilled an 18,000 ft well in 16 days in the Permian Basin. Last year it took 30 days,” Scott Sheffield, head of Pioneer Natural Resources emphasized. The Permian Basin in Texas could alone produce 5-6m b/d in the long-term, more than Saudi Arabia's giant Ghawar field, the biggest in the world, he pointed out. Although the North American rig-count dropped to 664 from 1,608 in October, yet the output has risen to a 43-year high of 9.6m bpd in June. It has only just begun to roll over. “The freight train of North American tight oil has kept on coming,” Exxon Mobil CEO Rex Tillerson too added. Similarly, gas prices have collapsed from $8 to $2.78 since 2009, and the number of gas rigs has dropped 1,200 to 209, yet output has risen by 30pc over that period. The equation is changing. Oil producers are faced with a real headwind - for a longer period of time than what some anticipated initially. Crude oil producers are cognizant of the changing environment. “It is becoming apparent that non-OPEC producers are not as responsive to low oil prices as had been thought, at least in the short-run,” the Saudi Arabian Monetary Agency underlined in its recent Financial stability report. “The main impact has been to cut back on developmental drilling of new oil wells, rather than slowing the flow of oil from existing wells. This requires more patience,” it added. A storm is in the making. All eyes are thus focused on Saudi Arabia, the OPEC kingpin. With the economy managers in major Gulf crude producers - dependent heavily on petrodollars - appear faced with real challenges - interesting questions continue to make waves all around. How long the OPEC oil producers could sustain the scenario - remains the big if? A task of mammoth proportion is definitely in hand. Throughout the energy-rich region, budgets are under considerable pressure. When the UAE announced winding off petrol subsidiary from beginning this month, this was regarded by most as a measure to plug the widening budgetary gap. Others, including Saudi Arabia are no exception. With the Saudi ‘fiscal break-even crude oil price' estimated by some at $106, and markets continuing to be at less than half the value, the budgetary deficit is definitely widening. As per the International Monetary Fund, the deficit in Saudi Arabia will reach 20pc of GDP this year, or roughly $140bn. Standard & Poor hence lowered its outlook of Saudi Arabia to “negative” in February. “We view Saudi Arabia's economy as undiversified and vulnerable to a steep and sustained decline in oil prices,” it then said. With growing public expenditure, the fiscal gap needed to be plugged - somehow and from somewhere. When a decision was made in Vienna, at the OPEC ministerial, not to cut output, everyone knew it would impact the markets. However, analysts also conceded then, Riyadh had the financial muscle to weather the storm in the short term - so as to ensure a smooth run in the longer run. The bitter pill was hence regarded by many as a brute necessity to maintain market share of the efficient producers and in the process outdo the inefficient producers. Yet the policy carried its consequences too. The Saudi foreign reserves that peaked at $737bn in August of 2014, dropped to $672 this year in May. At current prices they seem falling by at least $12bn a month, some reports say. Saudi Arabia thus needed to take measures to handle the scenario. Fahad Al-Mubarak, the governor of the Saudi Arabian Monetary Agency said in July that Riyadh had issued its first $4bn in local bonds, the first sovereign issuance since 2007. Now there are reports in the international press that the Kingdom was returning to the international bond market to raise $27bn by the end of the year. Bankers were reported by Financial Times and others as saying the kingdom's central bank has been sounding out demand for an issuance of about SR20bn ($5.3bn) a month in bonds - in tranches of five, seven and 10 years - for the rest of the year. What does all this mean? If the oil futures market is correct, Saudi Arabia will start running into (financial) trouble within two years, says Evans-Pritchard, writing for The Telegraph. Saudi Arabia returning to the bond market is, ‘the starkest sign yet of the strain, lower oil prices are putting on the finances of the world's largest oil exporter,' underlined Financial Times in a recent write-up. Yet there is a catch to the emerging scenario. Saudi Arabia has faced similar situation(s) before too. In the 90's too, Saudi debt reached 100 percent of gross domestic product. Riyadh yet, managed to emerge out of the trough, as crude market prices firmed up in the subsequent years. That cannot be written off now too. After all, crude markets tend to be cyclical. Scenario could change, rather instantly, at any turn of events, taking gloom out of the markets. The long-term scenario too has many ifs and buts. The dwindling investment levels are a cause of concern and some now feel, it could give a real fillip to the markets - in not too distant a future. The battle is on. Let's wait before passing the final judgment.
