How soon will Saudi Arabia blink? (dropping oil prices #14)
Here’s one summary to pull together the following five articles:
4/7 – Million Dollar Way – How Much Longer Can OPEC Hold Out? – Mr. Oksol points out the pressures on Saudi Arabia are growing. He previously pointed out that their fight with Yemen is costing a lot. They are buying lots of new F-15s and using up a lot of bombs. You can buy a lot more planes at $100 a barrel instead of $50.
It doesn’t take a rocket scientist to read between the lines. It’s getting expensive to fight ISIS and subsidize the Palestinians at the same time. And then there’s Iran to worry about.
4/7 – Reuters at Rigzone – Saudi’s Naimi Says Ready to Help Improve Oil Prices, But Not Alone – Comment by the Saudi oil minister are being interpreted to mean the Saudis are willing to curtail production as long as any cut is cooperative.
In diplo-speak he also repeated his position that the country is not competing with US shale production. As with other mandatory diplomatic niceties, I’m sure exquisitely few people on the planet believe his comment.
4/7 – Yahoo! Finance – How Much Longer Can OPEC Hold Out? – Article goes into lots of detail on the internal disagreements within OPEC. The group that wants lower production (with Saudi Arabia taking most of the production cut of course) is suffering a lot from low prices.
If the draft of a draft of a plan to reach an agreement someday on an Iranian nuclear bomb bears fruit and sanctions are lifted, there could be another 800K or 1M barrels a day on the market, which would drop prices further. Pressures within OPEC are building.
4/11 – Wall Street Journal – Saudi Arabia Maneuvers to Retain Oil Crown – Saudi exports fell 5.7% in 2014. Shipments to its two largest customers are collapsing. Exports to China hit a five-year low in the first two months of 2015. Exports to the US dropped by half in 1/15 compared to 1/14.
They have cut prices charged to China nine times but are still losing sales to Russia and other OPEC countries.
Senior officials in Aramco deny there is a price war. Yet the Saudis keep getting outmaneuvered. Aramco lined up a new $10B line of credit and is looking for 20% price cuts from their vendors.
4/8 – Yahoo! News – Saudi ‘to borrow to finance soaring deficit’, says report – A Saudi research firm estimates the government will have a $106B deficit instead of the government’s forecast of $39B. Current account deficit will likely be $23B instead of a $81B surplus last year.
4/11 – Million Dollar Way – The Myth Was That Saudi Has Huge Cash Reserves — It All Depends – Post points to the previous article.
Short version – With a foreign reserve stash of $714B, the Saudis can run a deficit of $39B for around 18 years. Not quite the several decades I’ve seen mentioned elsewhere, but that is quite a cushion.
With a deficit estimated at $106B, that is only a 6.7 year cushion. That is before counting the cost of the newly launched war against Iranian proxies in Yemen.
Mr Oksol points out a new F-15 costs at least $30M. A squadron of, say, 24 new jets will run around $0.7B. Add in fuel, training time, bombs, and lots of spare parts. (Anyone know what a spare engine costs and how many hours you can put on an engine?) Round up to $35M, add $10M for my wild guess of a few years worth of spare parts and a 24 plane squadron will set you back $1.08B.
Don’t forget operating costs.
A few minute search on the net provides estimates of $17K to $30K an hour in 2009 up to $43K an hour in 2013 for an F-15. My sources are listed in this separate post.
So let’s go with the numbers I’ve assumed. At $43K an hour, putting 100 hours a month (another wild guess) on each of those 24 airplanes will run around $103M per month in operating costs. That’s about $0.1B per month per squadron. In turn, that is 2M barrels of oil a month at $50, or only 1M barrels at $100.
So, back to the headline of this post, when will the Saudis blink?