Piecing together the oil puzzle

Good friend Srinivas Thiruvadanthai sent me this link last night. That set me thinking as to whether Saudi Arabia has bitten off more than it could chew and whether it would set off some other chain reaction since the ‘gambit’ has gone badly for them, or so I think. Things have changed quickly. Until about May this year, Saudi Arabia was confident that it would weather the oil price swoon and that others, including US shale oil producers, would be hurt the most. Following is, more or less, a reverse chronology of articles in the last year or so.

This news of Saudi Arabia delaying payments to contractors must be quite embarrassing, if not downright humiliating.

There was a big feature article in Bloomberg Markets earlier this year centred on Mr. Ali al-Naimi as to how Saudi Arabia (and he, by extension) was the master string-puller of oil prices. This reinforced the message from the Reuters article below.

A Bloomberg piece in January 2015 also predicted that Saudi Arabia would last it out, compared to US shale oil producers.

According to some analysts, Saudi Arabia had initially wanted lower oil prices to extend the life of oil as the source of fuel and energy for the world. To perpetuate and extend the dependence on hydrocarbons. To snuff out marginal producers and hydrocarbon substitutes too. To put off the development of renewable energy sources:

Some OPEC members including Venezuela are clamoring for production cuts to push oil prices back up above $100 a barrel.  But Saudi officials have given a different message in meetings with investors and analysts: the kingdom, OPEC’s largest producer, will accept oil prices below $90 per barrel, and perhaps down to $80, for as long as a year or two, according to people who have been briefed on the recent conversations.

This Reuters article from November 2014 actually mentions that the Saudi oil minister had tied the decision not to cut production to taming competition from US shale oil producers:

Saudi Arabia’s oil minister told fellow OPEC members they must combat the U.S. shale oil boom, arguing against cutting crude output in order to depress prices and undermine the profitability of North American producers.

Ali al-Naimi won the argument at Thursday’s meeting, against the wishes of ministers from OPEC’s poorer members such as Venezuela, Iran and Algeria which had wanted to cut production to reverse a rapid fall in oil prices.

See this story in FT too towards the end of 2014. See the observations on Saudi Arabia:

Saudi Arabia

Fiscal buffers are in place to offset the impact of any potential domestic deficit but Saudi Arabia — the world’s largest exporter — will still be among the Gulf nations most affected by lower oil prices. At $60 a barrel the kingdom, whose oil receipts accounted for 85 per cent of exports and 90 per cent of fiscal revenue in 2013, would experience a fiscal deficit equivalent to 14 per cent of GDP in 2015, according to Moody’s. Its vast foreign exchange reserves, estimated at close to $740bn, will offset some of the negative effects of much lower oil prices, but such a stressed scenario is still likely to mean a pull-back in spending on social programmes which had increased substantially following unrest related to the Arab uprising. Even so, Riyadh has used its leading position in OPEC to resist calls for a production cut.

The above FT article had a link to an earlier article published in the same paper, a week earlier:

According to a well-placed Arab figure, a senior Saudi official told John Kerry, US secretary of state, while he was talking to Sunni Arab leaders this summer about a coalition against the jihadis: “Isis is our [Sunni] response to your support for the Da’wa” – the Tehran-aligned Shia Islamist ruling party of Iraq.

But, a sentence earlier was somewhat contradictory:

Iran, of course, is aligned if not allied with the US and its European and Arab partners, including Saudi Arabia, in the fight against the Islamic State of Iraq and the Levant.

In truth, Saudi Arabia might have decided to take credit for ‘masterminding’ a price decline that it might not have had any control over. That is the substance of the piece by Nick Butler in FT on December 15, 2014.

If it did not have any control over the price movement in 2014 that has continued into 2015 with dire consequences, what would be its response now? To try and squeeze the price higher? How? Any geopolitical ‘accident’ would help? Or, would it still last it out for a year or two and see off other marginal producers in the U.S. and elsewhere? Certainly, Iran would love to have higher oil price too, as it wants to ramp up production after the lifting of sanctions. So, would that discourage Saudi Arabia from trying to engineer a higher price? Alternatively, does it have the financial resources and tolerance for pain to go through another year or two of lower or even declining oil price?

Amidst all this focus on producers, demand does look set to remain weak with global growth heading lower? Probability of a U.S. recession in 2016 is non-trivial. Doubt if further demand collapse is in the oil price yet.


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