Crude Economics
Are Petrostates Happy With Oil Prices?

Oil producers around the world are always attentive to the fluctuations of crude prices, but they’ve been paying special attention this year to see how far the petrostate production cut is going to inflate those benchmarks. Brent crude—the stand-in for European oil prices—is up roughly $10 per barrel since the cuts were announced, and that is, apparently, a “very comfortable” price level for the Qataris. Bloomberg reports:

“Given where we see the oil prices today, I think we are somewhere close to break-even,” [Qatari finance minister Ali Al Emadi said Tuesday]…Spurred by lower revenue from energy exports and overlapping bureaucracy in places, Qatar has merged ministries and canceled or delayed some projects over the past two years. This helped to curb operating costs while the government continues a spending plan that will peak by 2019, Al Emadi said.

The oil-soaked Gulf country has worked to curb government spending in order to avoid the sort of out-of-control fiscal deficits that many major crude producing regimes have been faced with following the collapse in crude prices two and a half years ago.

That’s all well and good for Qatar, but what about all those other petrostates struggling to stay in—and keep pumping—the black? According to the IMF, only Kuwait and Iran have fiscal breakeven prices (the bare minimum price per barrel needed for a supplier to balance its fiscal budget) below the Brent benchmark, which today is trading just above $55 per barrel. To avoid running a deficit, Algeria would need oil to trade above $85 per barrel, the Saudis need $70, Bahrain requires $93, and Libya won’t zero out its fiscal balance until crude hits $149 per barrel. Qatar, in other words, are the only petrostate that can reasonably be content with the status quo.

But there remains a large problem for all of those other countries, both inside and out of OPEC, which still need crude to climb further: American suppliers. As these petrostates have reduced their own output to help give prices a boost, they’ve also bumped prices up for their U.S. competitors, and as a result we’ve already seen a major uptick in American crude production. Since early October, U.S. output has climbed more than 500,000 barrels per day, in large part thanks to rising prices making more shale plays profitable once again.

$50+ crude has been enough to help out American frackers, but there’s another group of U.S. suppliers waiting in the wings, should prices continue to rise: offshore drillers. This group has thus far not enjoyed the full impact of the American oil rebound, but if the West Texas Intermediate (WTI) benchmark—what we use to look at the price of oil here in the U.S.—should creep past $60 per barrel, these marine producers will get to join the party.

This American oil resurgence is diluting the effect of the petrostate cut by continuing to support the crude glut that led to the price collapse in the first place. Shale is on the rebound in 2017, and offshore producers aren’t far behind. So with that, a word of caution for all of those petrostates not named Qatar that might be hoping that their production cut will send prices higher: be careful what you wish for.

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