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| Saudi Market Share Strategy Backfiring? |
| 2016-02-04 |
| Yves here. Stocks around the world took a nosedive today, due to WTI sliding to under $30 a barrel, as well as disappointing earnings announcements from Chevron and BP, along with a warning from Standard & Poors. But the bigger cause of the sour mood which apparently swept from oil stocks into the broader market, was that a rumored deal among Russia, Iran, and the Saudis is nowhere near as imminent as the hype of last week would have investors believe. And there’s an obvious reason why. As we indicated last year, when Saudi Arabia embarked on its oil-price-cutting strategy, which is what refusing to reduce production to support prices amounted to, it looked like a masterstroke. It had several sets of opponents in its crosshairs. The firs was US frackers, who posed an intermediate-term threat if the shale boom and resulting government subsidies supported the construction of LNG transport facilities (which on a cold-blooded economic calculation are not justifiable given that under the old normal, shale production would have peaked around 2022 and started declining gradually, then more sharply around 2030, and that assumed no curbs due to earthquakes or water supply impact). Second was clean energy, which becomes much less attractive if conventional energy becomes cheap. Third was Saudi Arabia’s geopolitical opponents, most important Russia and iran. Recall that the Western media went all in on the story of Russian vulnerability. In 2015, Europe tightened sanctions, and the Western leaders were in barely-veiled terms calling for regime change in Russia, on the premise that Putin could not survive the one-two punch of low oil prices and foreign sanction. Here we are, in 2016, with barely an acknowledgment of that period. Not only did the Europeans overestimate Putin’s vulnerability, but the Saudis badly underestimated theirs. It’s impossible to know what scenarios the Saudi officialdom ran, but it appears their downside case was not that much more dire than that of conventional wisdom as of early 2015: that oil prices would be low for the first half of 2015, and would recover to more or less their former level in the second half of the year. One has to think the Saudis allowed for some overshoot in terms of what then would have been seen as a dire scenario, say oil below $60 for nine months. In other words, the Saudis simply did not anticipate that both government and private producers had the same incentives: to keep pumping because they needed the revenues so badly. And the deterioration of the Chinese economy and lousy fundamentals in Europe mean that low oil prices haven’t led to an upswing in consumption to offset the surplus supply. And they further underestimated the staying power of some of those players. As John Dizard pointed out early on, US shale players would keep going as long as they had access to funding (and they also got adept about cost reduction, in cutting back at higher cost sites and increasing output at ones with better economics). And even though oil is an important export for Russia, it is far more diverse an economy than is widely understood and much closer to being an autarky than one-trick-pony Saudi Arabia. So the severity and probable extended duration of low oil prices has blown back on Saudi Arabia in a very nasty way, particularly since its government and society have become very dependent on a high level of oil revenues. Russia and Iran are thus able to exploit the fact that the Saudis are hoist on their own petard. They won’t do an oil deal unless they also get a deal on Syria. That is something the Saudis will find very hard to swallow. But all that Russia and Iran have to do is stand pat. The Saudis can’t take protracted budgetary hemorrhaging and they know that. But it may nevertheless take time for the Saudis to swallow their pride and make the necessary concessions (and figure out how to make them look like peace with honor). And the longer this impasse persists, the more Mr. Market will continue to fret. More at the link |
| Posted by:badanov |
| #1 The Soddies are likely looking for a face saving way out. If the non-OPEC oil producers agree to make (token) cuts in production then the Soddies could declare victory and start ratcheting down their own production. Funny how you haven't heard a peep from the peak oil crowd. |
| Posted by: Sven the pelter 2016-02-04 11:02 |