November 28, 2014 was the day that rocked the energy complex off its moorings. Tremors and aftershocks continue into 2016 as energy market participants struggle to understand the future of an unhinged market.
The hinge came off when Saudi Arabia announced it was no longer willing to be the price stabilizer for crude, rejecting cries from OPEC member countries to lower crude oil production.
Saudi Arabia blocked calls from poorer members of the OPEC oil exporter group for production cuts to arrest a slide in global prices, sending benchmark crude plunging to four-year lows.
Brent oil fell more than $6 to $71.25 a barrel after OPEC ministers meeting in Vienna left the group's output ceiling unchanged despite huge global oversupply, marking a major shift away from its long-standing policy of defending prices.
This outcome set the stage for a battle for market share between OPEC and non-OPEC countries, as a boom in U.S. shale oil production and weaker economic growth in China and Europe have sent crude prices tumbling.
"It was a great decision," Saudi Oil Minister Ali al-Naimi said as he emerged smiling after around five hours of talks. The jury is still out on whether this was a great decision for Saudi Arabia. They are rapidly losing desperately needed oil revenues. Increased domestic expenses along with the war with neighboring Yemen is posing increased budgeting stress. “This war is draining the Saudis militarily, politically, strategically,” said Farea al-Muslimi, a Yemen analyst at the Beirut-based Carnegie Middle East Center.
“The problem is, they’re stuck there.”
Saudis have been busy cutting domestic spending and raising taxes to cope with the lower oil revenues. Not a good recipe for a country whose people have never been good at
accepting austerity measures.
The ratings agencies are starting to take notice. Standard Poor's Ratings Services in October lowered Saudi Arabia's long-term foreign currency sovereign credit rating to A+ from AA-, citing a widening budget deficit resulting from weaker oil prices. The ratings agency projected the country's fiscal shortfall will jump to 16% of gross domestic product in 2015 from 1.5% in 2014. S&P said it expects Saudi Arabia to draw down its fiscal assets and issue debt to finance its deficit, though the country does not have much monetary-policy flexibility given the riyal's peg to the U.S. dollar. "The outlook remains negative, reflecting the challenge of reversing the marked deterioration in Saudi Arabia's fiscal balance," said S&P.
Deja vu may soon be coming for the kingdom of Saudi Arabia. In January of 1999 Saudi Arabia could no longer idly watch the continued descent of crude prices causing the kingdom's five year credit default swap (CDS) spreads to skyrocket. They cut crude production resulting in a prolific fifteen year crude bull market.
There is nothing like good old fashioned market pressure that will soon be applied by Saudi CDS spreads that may lead to a repeat of 1999 crude production reductions.
