Oil Price War? | Russell T. Rudy Energy LLC
No one knows where the price of crude will ultimately bottom out, or how long it will take to get back to previous highs. However, it is becoming evident that OPEC in general, and the Saudis in particular, are not afraid of the sight of blood. Three factors, supply and demand, human nature, and geopolitics all make me pessimistic. I fear that things are going to get worse before they get better.
It is no secret that for some time now, OPEC has been concerned with the impact the shale revolution in the U.S. and Canada has had on the global market. Over the past five years this has increased worldwide supply by 3.5 million barrels of oil per day (bopd), and has upset the Saudis, and to a lesser degree, the UAE (see recent post re: interview with their oil minister Suhail bin Mohammed al-Mazrouei https://rudyenergy.com/uaes-take-on-oil-prices/ ). The Saudis have always prioritized market share over short term prices, so this should not surprise anyone.
OPEC is also concerned about worldwide demand. The developed economies are learning to conserve, so even with economic growth this can offset increases in demand. Of the developing economies, China in particular is experiencing a decline in growth, and consequently, demand for energy. These factors alone (incremental supply and stagnant demand) would exert downward pressure on prices.
Another reason for concern is that unlike previous attempts by OPEC to manipulate prices, this time members are not being asked to act contrary to what they perceive is in their short term interests. Before, when OPEC tried to raise prices by cutting back production, member states offset reduced volumes by violating their quotas. This was done to maintain overall revenues. However, in this case, members see it in their interest not only to produce at current levels, but to increase production to offset the price drops. Consequently, the current situation is much more sustainable for the long term than prior attempts at enforcing quotas.
Finally, while I don’t pretend to know what is in the hearts and minds of the Saudi elites, it is safe to say that they have demonstrated fear of, and loathing for, Russia and Iran. Russia’s recent forays into the Ukraine, and Iran’s apparent rapprochement with the U.S. re: nuclear power, have only reinforced these sentiments. What better way to wreck their economies than by cratering oil prices?
The current glut of OPEC production is sustainable for the short and intermediate term. Apparently, the cartel is expecting us to cut back first, in order to help prices recover. Whether we do so through shutting in production or reduced capital spending is not the issue. What matters is that things will probably get worse before they get better.
