Remember: Saudi Arabia Budgets For $100 Oil -- December 23, 2015

[Snide remark: for all those folks who keep writing me to tell me that the break-even price for crude oil for Saudi Arabia is $7, please see the graph below. It never was $7; it never will be $7.]

Two years ago, Saudi Arabia set its budget based on "$100 oil."

With the incredible slump in the price of oil -- a huge miscalculation on the part of Saudi Arabia -- it is now estimated that Saudi Arabia requires "$106-oil" vs the posted $40-oil, give or take a few dollars.

This is an existential issue for Saudi Arabia.

Fortunately, oil will eventually get back to $100. Twenty-four (24) years from now. CNBC is reporting:

Oil prices will take decades to recover and will still not reach the peak seen in recent years, according to the latest World Oil Outlook (WOO) from OPEC.

In the group's latest outlook on supply, demand and prices to 2020 and 2040, OPEC predicted that a barrel of oil would cost (in real terms) around $70 by 2020 and $95 by 2040, a far cry from a high point of $114 a barrel last seen in June 2014 before prices began to plunge on oversupply. On Wednesday, a barrel of benchmark Brent crude cost $36.51, a shade above WTI at $36.47.

Price declines were exacerbated by the decision last year by OPEC, the 12-member producer group led by Saudi Arabia, not to cut production. Still, OPEC's Secretary General Abdalla Salem El-Badri said OPEC had been a bastion of stability amid volatile times for the oil industry.

"The supply and demand balance in 2015 has been one of oversupply, with stock levels rising to well above the five-year average. Despite this market instability, OPEC has continued to be an efficient, reliable and economic supplier of oil," El-Badri noted in the foreword of report.

Later in the report El-Badri talks about el-unicorns.

By the way, CNBC's analysis is wrong on several points, but the general thesis is correct.

I was unable to post the above due to wi-fi problems. While waiting, a reader sent me this story from The [London] Telegraph: it's now becoming clear -- OPEC has no grand strategy.

About a year ago, Saudi Arabia turned its oil spigots on full in an attempt to maintain market share, the other Opec countries followed suit, and the world was flooded with cheap crude.

The received wisdom is that the club of 13 oil-producing countries is trying to squeeze higher-cost producers like the US shale industry. But that theory is looking increasingly fragile in the face of the facts.

The most telling of these is that US oil production has almost doubled in the past four years from around 5.5m barrels a day in 2011 to a peak of 9.7m in April this year.

The recent oil glut has merely forced shale producers to become more efficient. The increase in output has been achieved, despite a reduction in the number of rigs, thanks to a startling rise in productivity – up by 30pc a year between 2007 and 2014.

It is true that there are some signs of strain. The US energy revolution has been financed with cheap debt: the two biggest months for bond issuance by American oil and gas companies since 2014 were February and March this year.

And that party could soon come to an end now that the Federal Reserve has slowly started to extricate the punchbowl. Two-thirds of bank loans tracked by the S&P oil and gas index were trading at distressed levels at the end of November, up from 13pc in May. US shale production has also started to tail off a little in recent months (though nowhere near as much as was expected).

But even if there is a financial reckoning, and a number of shale companies go bust, their operations will merely be taken over by better-run rivals.

The oil is certainly not going to disappear. Experts now believe that the Permian Basin in Texas is capable of producing up to 6m barrels a day – more than Ghawar, the world’s biggest field, in Saudi Arabia. And shale production is relatively flexible – shut it down for a while and it will bounce right back as soon as prices start rising.

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Venezuela: Tick, Tick, Tick

Old, old news but Rigzone provides an update:

Forget the opposition. OPEC is doing more to ruin the holiday season for Venezuela President Nicolas Maduro than any of his rival lawmakers.

Maduro stepped up attacks on his opponents this month after they won enough seats in congressional elections to challenge his government.

While bonds initially rallied on optimism the opposition victory could lead to more market-friendly policies, Maduro’s comments quickly killed that euphoria.

Now, it’s the rout in oil that’s doing the most damage to the prices of the securities.

Oil, by far Venezuela’s biggest export, has plunged 17 percent to an 11-year low since the Organization of Petroleum Exporting Countries abandoned production limits at its December 4, 2015, meeting.

Venezuela’s benchmark bonds due in 2027 are at the cheapest since August, and traders see a 71 percent probability that the country will default in the next 12 months, credit- default swaps show.

That’s up from 61 percent the day before the OPEC decision.

“The initial reaction to the election results was positive, but then oil just collapsed,” said Phillip Blackwood, a managing director at EM Quest, which advises Sydbank A/S on its debt holdings.

“The bills still need to be paid and that comes from oil.”

Oil at these levels could prevent Venezuela from meeting its debt obligations as soon as February.

The OPEC member relies on income from oil sales for almost all of its hard currency. It may need to sell $20 billion of gold or other assets to meet next year’s commitments.

Venezuela’s crude basket fell to an 11-year low $29.17 last week. “The latest decline in oil may have undermined government confidence, putting even this payment at risk.”

71%? My analysis suggests 73% but I'm often wrong.