The American Pravda, NYT, usually reports that Saudi Arabia is trying to maintain market share or kill US share production growth as the reason for the current oil price collapse. The real story is the full court press on regime change in Russia – a hot phase crisis since the Ukraine Maidan.
Having traded oil futures and equities for nearly twenty years , my market sense tells me the current opec policy does not hold water.
First of all, one must understand that SA, and most of the gulf are colonies of the oligarchy. London money interests put the backward yokels in charge – kicking out the Hashemite rulers. If that old history is not too clear – watch Laurence of Arabia – but just understand who he worked for and who really runs policy in the desert. More recently, the fact that US and UK kept all the Gulf Sheiks in power when Saddam ( with tacit green light from the US – the usual bait and war as with Pearl Harbor ) had them by the balls in Gulf War I should crystallize in your mind that western elites run policy in most of the ME – and most of opec policy is not independent of the masters. The US and UK train and arm most of the Gulf countries’ intelligence and armies, but more importantly the rulers know they stay in power at the pleasure of some of the Western oligarchy.
In that light, what has been Saudi policy with regards to the oil price for the last 15 years ? The Saudis have been playing the role of swing producers absorbing demand and supply shocks to keep oil within a price band that they determined. SA and Kuwait have been the main movers, and they get the rest of opec to kick-in to a lesser degree – and if they do not, SA has punished by opening the taps. Everyone in opec understands the dynamic that going along with the Saudis may mean a small 5% cut, but keeps prices up significantly higher. Thus, opec has been mostly a revenue maximizing cartel – where they have attempted to keep prices within a range that maximizes long run revenue – not short-term.
Like all large organizations who are slow to react to new realities, they missed the boat on the peak plateau of convention crude production in the early part of the first decade and were slow to move their oil price band above $30 – they still remembered how in 1999 when the glut forced oil down to $10 so were reluctant to move it higher. They really are as bind as everyone else what they true elasticity of demand is. Soon, they discovered that the market could easily handle $75 oil. Likewise, they produced far above demand in ‘2007 and 2008 to reduce the finance manipulated “super-spike” to $150 – which only caused prices to crash to $30 in a flash.
So why are they not profit maximizing today ? They could easily cut 1mm today and keep prices in the $75 range. That is by cutting production about 3% ( 1mm out of opec’s 30mm quota or a bit more from 30.6 actual) they could achieve a 25% increase in price.
Well, the market share argument is that you cause the high cost shale, oil-sands and deep offshore producers to close up shop. The problem with that is most of the online production is of reasonably low operating cost $50 and below – it is the high capital cost of these projects that require $75+ oil. So you will not see any shut-ins – high cost oil will still be producing because it is economic on an operating basis, but you see curtailment of new projects because of long-term PV where the front months are low prices, lower cash flow to fund new drilling, and the closing of the capital markets to an over-leveraged industry. What this means is that we are in for a long-period of low prices until worldwide production rolls over to match demand.
Does this policy make any sense ? – no. Because although capital intensive projects may be curtailed, they will come right back on stream once oil rises. The drilling response to high prices will be swift and within 12-18 months, the whole sector will be back to high capacity usage. In addition, the lull in drilling will cause drilling service costs to plummet – reducing the price point where drilling will commence again. One can model a number of scenarios, but I do not see way that the current opec policy is anything but a money loser. There was excess investment in the sector (which has been obvious for a while and so the sudden price collapse is always interesting given the fundamentals have been obvious) , and so we should have a bust. This is time-tested and natural investment cycle. However, shale is here to stay for the next 10 years, so should Opec accommodate and profit maximize – which they are not doing – they are risking $35 oil. Note all the bankruptcies and closed projects – does not change the fact that the oil is still in the ground and will come back out at higher prices – only that the ownership will change – watch who obtains capital and is buying – it will reveal some of the oligarchy that has preferential access to the money spigots.
So it seems the obvious reason is full court press on Russia. For SA,Kuwait, and Qatar, an additional reason is payback for Russian support of Syria where the western oligarchy having been using the opec countries as middle men to fund terrorists to overthrow the government. In spite of trying to make deals with Russia, and conducting false flag terror events , Russia has not stopped it’s support(though minimal) of Syria, preventing an outright bloodbath in that country.
I believe the western oligarchy has made the deal with SA to punish Russia even though SA will be hurt in the short-term. I believe the stick to make SA comply (assuming even that they resisted), were the ISIS threats (ISIS being a manufactured player of Western intelligence).
By crashing the oil price for a year or two, Russia will be put further in crisis and the western oligarchs hope not only to achieve a regime change in Russia, but also leave Syria in shambles.