Saudi’s Unlikely To Budge At Next Weeks OPEC Meeting

Crude oil continued its surge to trade at 43.17 adding 12 cents in the Asian session while Brent oil gave back 4 cents of Wednesday’s gains to 46.23 as the spread gained to over $3. Oil continues to gain ground after data indicated a decline in active U.S. oil rigs and a smaller-than-expected crude-oil inventories, analysts say.

Industry group Baker Hughes reported the number of U.S. working oil rigs fell by nine, extending last week’s drop. U.S. crude stockpiles grew by 1 million barrels in the week ended Nov 20, smaller than the 2.6-million-barrel expansion previously estimated.

US markets are closed for the Thanksgiving holiday and low oil prices have given the US a leg up on the holiday season. Prices are at their lowest level for the holiday since the financial crisis of 2008 despite heightened tensions in the Middle East and a spate of terrorist attacks that would normally lead to higher prices. On Wednesday, the national average for regular gasoline was $2.06 a gallon, 8 cents lower than a week ago, and 75 cents lower than last year, according to the AAA motor club. The price of gasoline has tumbled for weeks.

Oil prices have remained suppressed since the summer of 2014, dropping to levels previously seen during the financial crisis. Most analysts say unless major oil producers, particularly those in the Saudi Arabia-led Organization of the Exporting Petroleum Countries, reverse their “no-cut” strategy to trim output, prices will likely remain weak.

This leads us to an important question that everyone is now asking, and that is how long Saudi Arabia can play this game. Recently an interesting article in CNN Money reviewed production cost from around the world. In the United Kingdom, it costs $52.50 to produce a barrel of oil — which is trading right now around $42. Oil production in Brazil costs nearly $49 per barrel. Production costs around $41 a barrel in Canada. In the United States, production costs are $36 a barrel — still below the trading price.

On the other side of the coin, Saudi Arabia and Kuwait can pump a barrel of oil for less than $10, on average. Iraq can produce oil for about $10.70 per barrel.

Even though at 40-50$ per barrel, it seems that the Saudi government is making tons of profits but its entire government and the extended royal family depend on the income from oil. When oil prices are below $50 there is not enough funds to cover government expenses and other costs. The 60% plunge in oil prices since June 2014 has slashed OPEC revenue by nearly $500 billion a year, according to the International Energy Agency.

On Monday, Saudi Arabia’s official news agency reported that the country is ready to “cooperate with all oil producing and exporting countries.”

But the comments didn’t give any details or signal a new willingness to cut output and the kingdom has made similar remarks in the past. A Saudi ministerial source told CNN the Saudis will not budge if Russia continues to produce nearly 11 million barrels per day, Mexico is not part of the non-OPEC equation and if Iraq refuses to live by an OPEC quota. In other words, the status quo looks intact.

The Saudis are joined by rich neighbors like Qatar, Kuwait and the United Arab Emirates. These countries have the financial firepower to withstand cheap oil — at least for a few more years. The Gulf countries, especially Saudi Arabia, can also theoretically cut back on production. But they fear doing so will only cede more market share to the U.S., Russia and rival OPEC countries.