On Oct. 9, we said the outlook for the world’s petrocrats looked bad. It just got worse: Saudi Arabia has been hoping that producers of American shale oil will be forced to begin cutting back given the plunge of oil prices, but the International Energy Agency (IEA) said today that prices can fall a good deal more.
What does that mean for geo-politics? Admittedly long-shot nuclear talks with Iran that resumed today in Vienna may stand a better chance of resulting in a deal. And Russian leader Vladimir Putin may be more conciliatory with Ukraine in gas-price discussions that begin next week.
Shale oil producers will be less affected. Two weeks ago, a leading Saudi oil official said (paywall) that US shale requires $90-a-barrel prices in order to stay profitable. Today, the price of internationally traded Brent crude crashed below $87 a barrel and was trading as low as $86.17, a 25% drop from the June price of $115.71.
In a report this morning, the IEA said oil prices could go as low as $80 a barrel and barely put a dent in US shale production: from 2.8 million barrels a day this quarter, shale oil production would fall to 2.7 million barrels, a drop of 4%, the IEA forecasts. Likewise, drillers globally would only slightly cut back high-cost projects, reducing worldwide production by just 2.8% or 2.6 million barrels a day, to 90.6—hardly a tragedy. Here’s an IEA chart of the impact of $80-a-barrel oil on North American crude types.
Not everyone thinks the price dip will last. The Eurasia Group cautioned today that the market is sanguine and that prices will start going up by the end of the year. “The current lack of concern about both Libya and Iran is misplaced, along with the growing assumption that Saudi policy has fundamentally shifted away from actively managing supply.” Eurasia Group’s note goes on:
Libya is likely to see a reversal of its recovery in oil output as the civil war deepens, and November 2014 represents a fork in the road on Iran, with the more probable outcome being a push by the US to further curtail Iran’s oil exports as nuclear negotiations fail to reach a deal or be extended.
Full article: Petro-dictators are in even more trouble than we thought a few days ago (Quartz)