Oil Falls as Saudis Say OPEC

Output Freeze Unlikely

Wednesday

Kim Justine Vinzon

Ian Harold Espineli
Keith Ian Micko Rosales

SUMMARY HIGHLIGHTS

Oil dropped after Saudi Arabiasaid it doesnt expect a

production accord to be reached whenOPEC ministers meet
Wednesday, but left open the possibility of a deal when they
gather in November.

Influential forecasters gave a worsening outlook for the

market, with the head of the International Energy Agency
saying supply and demandwont be in balanceuntil late
2017

Saudi Arabia offered tocut productionto January levels,

according to Algerias Energy Minister. That would remove
about half of the kingdoms 1 million barrel-a-day increase
in output since it led OPECs push to defend market share in
2014. The U.A.E. supports a deal to freeze output if other
nations agree, but production cuts are not up for discussion,
Oil Minister Suhail Al Mazrouei said.

A global oil surplus of 400,000 barrels a day is anticipated in

the fourth quarter 2016 after a 300,000 barrel-a-day draw
forecast earlier, Goldman Sachs analysts wrote in a research
note Tuesday. The supply-demand balance is weaker due to
higher third-quarter production

A DISAGREEMENT BETWEEN
PARTIES

Still, Iran and Saudi Arabia face significant hurdles as both

nations have yet to agree on their respective new production
targets. The reason why they are having problems with
agreeing is because Iran recently has been allowed to sell oil
into international markets and they are eager to increase
production.

As OPEC headed into informal talks in Algiers on Wednesday,

they have now two months to resolve differences over
production limits if they want to secure an agreement that
could prevent another year of oversupply on the oil market.

The two countries started the meeting looking to close a gap of

600,000 barrels a day between their respective positions. The
difference, more than the daily production of fellow OPEC
member Ecuador, shows how much work remains before the
group can replace the pump-at-will policy adopted in 2014 that
suspended the oil market, shaking investors, corporations, and
entire economies.

GLOBAL IMPACT
BAD

The real impact of this will be felt by the small and medium sized
independent oil and gas producers, and would expect a
significant number of bankruptcy filings for the rest of the year,
including filings by some larger, more established companies if an
agreement on oil freeze will not be pursued

GOOD

Lower oil prices will increase global growth since there will
be an increase in spending by oil importing countries which
exceeds the decline in expenditure by oil exporters.

Billions of people will have cheaper energy, theyre going to

have more disposable income, which will accelerate global
economy.

Transportation costs would be cheaper, wherein products

would be priced lower.

SAUDI
ARABIA

Saudi Arabian government is heavily dependent on oil revenues, with

almost 90% of its governments revenues coming from oil.

The recent fall in oil prices is likely to result in in a higher government

deficit and may result in lower government spending.

IRA
N

Iran depends on oil for slightly less than half of its total revenues and
more than 80% of its export revenues. So the recent fall has already lead
to lower figures in its budget estimates. Iran needs oil prices to be above
US $130 to balance its budget.

UNITED
STATES

Though the US is the second largest importer of oil, it is also one of the
largest producer of oil and there has been a significant increase of
production of oil in the US for the past 5 years.

GOOD Lower oil prices will benefit consumers for it will increase their
savings that will lead to increased consumption, which will eventually
lead to an increase in the countrys GDP.

BAD lower oil prices will hurt U.S shale oil producers. It will also affect
the profitability of US energy companies such as Exxon, Chevron, etc.

CHINA

China depends on almost 60% of its consumption on oil imports.

GOOD lower prices will certainly improve Chinas current account

surplus (net lender to the rest of the world) (positive difference between
a nations savings and investment) and lower costs of businesses. The
Chinese government has utilized the recent oil price fall to increase
strategic oil reserves.

JAPAN

Japan imports most of the oil it consumes.

GOOD Japans power sector is likely to benefit since it has been using
oil power plants to make up for the lost capacity due to the closure of
nuclear reactors.

BAD lower oil prices will decrease inflation because of increased

household spending, which will make it difficult for Japan to achieve the
aim of 2% inflation rate.

SPECIFIC COMPANY ANALYSIS

Saudi Aramco is the state-owned oil company of the Kingdom of Saudi Arabia
and a fully integrated, global petroleum and chemicals enterprise.

Over the past 80 years they have become a world leader in hydrocarbons
exploration, production, refining, distribution and marketing.

Saudi Aramcos oil and gas production infrastructure leads the industry in scale
of production, operational reliability, and technical advances. Our plants and
the people who run them make us the worlds largest crude oil exporter,
producing roughly one in every eight barrels of the worlds oil supply.

Effect on the company

Oversupply in the market would lead to oil prices to fall, therefore the
revenue of the company would also fall and they produce more or
maximum cap to attain the companys planned revenue for the month.

The company value of Saudi Aramco would experience a slight

temporary decrease as oil per barrel is stabilizing at below 45 dollars.

It is expected that oil prices would start to slowly increase in price when
the OPEC countries come into agreement. A freeze and limitation would
control the prices of oil and oversupply in the market can be prevented.
This would slowly rebalance the prices and would affect the company
positively.

Based on additional information, the company is searching for an

offshore oil field. In this case, the management is assuming that the deal
between Saudia and Iran would be successful. We conclude that an
increase in production cap of Saudia assuming it is accepted, would
provide more space for production, thus Saudia Aramco has the
opportunity to further increase its market share in the country.

Thank you for Listening!