Monday, November 24, 2014

The Wayang Kulit Behind Oil Price Gyrations

Is there a puppet master, I mean nothing much has changed for much of 2014, so why the sudden drop in oil prices over the past two months? One can cite US production of shale oil but thats not like something happened overnight. All knew the numbers coming on from shale oil. So what gives?


Opec divided on oil output
LONDON: The Organization of Pe- troleum Exporting Countries (Opec) oil producers cartel will hold one of its toughest and most significant meetings in recent years as, faced with sliding prices, its members must contemplate whether to cut output.
Ahead of Thursday’s Opec meet- ing in Vienna, its dozen member countries are split on what direction to take after a 30% drop in crude prices since June has slashed rev- enues.Opec’s poorer members, led by Venezuela and Ecuador, have
called publicly for a cut in output, while Iran has hinted at a need to reduce production.
But the cartel’s Gulf members, led by kingpin Saudi Arabia, are rejecting calls to pump out less oil unless they are guaranteed market share in the highly competitive are- na, according to analysts.
“The minimum consensus that appears likely to be reached at Opec’s meeting is a commitment to better comply with the official production target of 30 million bar- rels per day,” Commerzbank ana- lysts said in a note to clients. — AFP 

As you can see OPEC is almost toothless... not really toothless but rather that Saudi Arabia is not brandishing their big stick. So whats their motivation?

Apa Lagi Saudi Mahu?

Some cynics might say that its Saudis' way of trying to curb or trash the US shale oil's viability. That does not hold much water though nice conspiracy theory for a Hurt Locker movie script. 

Much of US shale oil can cost between $50-100 per barrel just to get the oil out. That is official figures fro International Energy Agency. The IEA confirms that ONLY 4% needs oil prices to be above $80 for it to be viable, though some analyst reports put that at as high as 20%.

It is very hard to displace shale oil as their wells are much shallower, which is to say they will move to more viable wells and will only tap harder to get at shale oil till prices move back above $90. 

Plus politically, it does not make sense to screw with USA while they are an important ally in the current 'war' against Islamic State.

It also does not make sense to screw with shale oil as their production costs will never be competitive against their own oil extraction cost. Saudis (and North Africa) cost per barrel is closer to $10 per barrel, though some areas may reach as high as $25 per barrel. Hence in actual fact it would make more sense for shale oil to continue as a base for oil prices, plus adding sufficiently to a resource that is limited. Its pointless to push oil to $200 per barrel, even if they can. The fallout to the global economy, and making themselves more a 'future target' for war for oil.

This Is Why Saudis Are Letting Oil Price Slip

Saudis can easily move oil prices back above $90 if they reduce their output and they can do so as they have the reserves to do so. Saudi Arabia has about 260n barrels in reserves and about 9-13m barrels a day. So what did the Saudis do in recent weeks... they actually increase their daily output by 0.5% to 9.6m a day. Strange isn't it? Not only that, the Saudis in recent weeks even offered discounts to big Asian consumers thus depressing oil price further.

Financially Saudi Arabia has over $700bn in cash/bonds reserves , so they do not need the money and can stay at this status quo for a couple of years if need be. The worst country to be affected is their 'enemy' Iran, which actually needs oil to be above $120-140 for it to break even. Russia needs $100 per barrel or else its budget loses $2bn for every dollar below $100... hence for now Russia will need nearly $40bn to watch the hole in their budget this year alone. 

It is also an important way to make life very tough for rogue nations in the Middle East supporting the IS as the funds are necessary to fund the war and terrorist acts.

The unfortunate nations who get steamrolled from all this include Venezuela and to a lesser extent Malaysia. 


Unknown said...

This is simply a Reenactment of the Oil Price Scenario just before the Collapse of the Soviet Block. Oil Price is Russia's Archilles Heel...This is just an addition to the current russian embargo to speed up the collapse of the Russian Economy.

Arno Nimouse said...

"It is also an important way to make life very tough for rogue nations in the Middle East supporting the IS as the funds are necessary to fund the war and terrorist acts."

Russia and Iran? Those two countries are actually allied to Syria, which is fighting the IS.

Tigerz said...

Saudi letting oil slip to thrash IS? I don't buy that. There are "spending" billions just to mess with IS this way is ineffective. There are better ways to spend the money to thrash IS. Namely funding an army. I still go with the shale oil theory and not to mention all the electric cars, renewable energy starting to make inroad in the market. Get the US addicted to cheap oil again (jualan murah). Or will they.

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