Best of the Week
Most Popular
1. Climate Change Mass Extinction - Birds, Bees and Bugs: Going Going Gone - Richard_Mills
2.A Purrrfect Gold Price Setup! - Peter_Degraaf
3.Who Finances America's Borrowing? Recession Indicator for Independent Thinkers Part 2 - F_F_Wiley
4.America’s One-sided Domestic Financial War - Raymond_Matison
5.Gold Price Summer Doldrums - Zeal_LLC
6.Two Key Events Will Unleash Gold - Jim_Willie_CB
7.Billionaire Schools Teacher in NAFTA Trade Talks - Richard_Mills
8.Get Out Of Crypto Cannabis Bubble Before It Pops and Move Into Bargain Basement Miners - Jeb_Handwerger
9.Stock Market Could Pullback for 1-2 weeks, But Medium Term Bullish - Troy_Bombardia
10.G7 Chaos, Central Banks and US Fed Will Drive Stock Prices This Week - Chris_Vermeulen
Last 7 days
The Death of the US Real Estate Dream - 22nd Jul 18
China is Now Officially at War With the US and Japan - 22nd Jul 18
You Buy the Fear in Gold - 22nd Jul 18
Trumponomics Stock Market 2018 - The Manchurian President (1/2) - 21st Jul 18
The Death of Japan's Real Estate Dream - 21st Jul 18
SMIGGLE Amazing Mega Shopping Haul, Pencil Cases, Smigglets and Giant Back Packs! - 21st Jul 18
Cayton Bay Beach Caravan Park Holiday - What's it Like? - 21st Jul 18
Gold Stocks Investment Wanes - 20th Jul 18
Diversifying Your Stock Investing Strategies is Smart Investing - 20th Jul 18
Custom Global Stock Market Indexes May Be Sounding Alarms - 20th Jul 18
S&P 500 Just 2% Below Record High, But There's More Stock Market Uncertainty - 19th Jul 18
Stock Market Technical Picture - 19th Jul 18
Gold Market Signal vs. Noise - 19th Jul 18
Don’t Get Too Bullish on Gold - 19th Jul 18
Bitcoin Price Rallies to Upper Channel – What Next? - 19th Jul 18
Trump Manchurian President Embarrasses Putin By Farcically Blowing his Russian Agent Cover - 19th Jul 18
The Fonzie–Ponzi Theory of Government Debt: An Update - 19th Jul 18
Will the Fed’s Interest Rate Tightening Trigger Another Financial Crisis? - 18th Jul 18
Stock Market Investor “Buy the Dip” Mentality is Still Strong, Which is Bullish for Stocks - 18th Jul 18
Stock Market Longer-Term Charts Show Incredible Potential - 18th Jul 18
A Better Yield Curve for Predicting the Stock Market is Bullish - 18th Jul 18
U.S. Stock Market Cycles Update - 18th Jul 18
Cayton Bay Hoseasons Caravan Park Holiday Summer 2018 Review - 18th Jul 18
What Did Crude Oil - Platinum Link Tell Us Last Week? - 17th Jul 18
Gold And The Elusive Chase For Profits - 17th Jul 18
Crude Oil May Not Find Support Above $60 This Time - 17th Jul 18
How Crazy It Is to Short Gold with RSI Close to 30 - 16th Jul 18
Markets Pay Attention Moment - China’s Bubble Economy Ripe for Bursting - 16th Jul 18
Stock Market Uptrend Continues, But... - 16th Jul 18
Emerging Markets Could Be Starting A Relief Rally - 16th Jul 18
(Only) a Near-term Stock Market Top? - 16th Jul 18
Trump Fee-Fi-Foe-Fum Declares European Union America's Enemy! - 16th Jul 18

Market Oracle FREE Newsletter

5 "Tells" that the Stock Markets Are About to Reverse

Crude Oil Price War - A Calculated Saudi Move Aimed At America

Commodities / Crude Oil Oct 10, 2014 - 09:38 AM GMT

By: Money_Morning

Commodities

Dr. Kent Moors writes: In 280-279 B.C., the Epirian King Pyrrhus defeated the Romans in two consecutive battles. But he suffered such a large number of casualties that his army could no longer carry on the fight.

Ever since then, the term “Pyrrhic victory” has become synonymous with winning at too high a cost.

These days some are beginning to wonder if the Saudis are marching down the same road.


By cutting prices rather than export volume, Saudi Arabia has signaled it is now ready for a potentially costly price war…

A Move to Target American Shale Oil

On October 1st, Saudi Aramco, the state-run oil producer of the world’s biggest exporter, cut prices for all its exports, reducing prices for Asia to the lowest level since 2008.

The so-called “Asian premium” I have talked about on several occasions – the higher price Asian importers need to pay over other end users for the same consignment of Saudi crude – is still there, but it has been reduced significantly.

What appears to be quickly forming is a situation that parallels an earlier Saudi move back in the mid-1980s. Under much lower pricing constructions, Saudi Aramco dramatically increased its exports, thereby slashing the cost of oil.

At the time, Saudi authorities were attempting to straighten out several recalcitrant OPEC members who were selling volume in excess of their monthly quotas. Saudi Arabia has traditionally served as “the balancer” in the cartel, offsetting actions by other members in order to maintain OPEC policy.

Today, the Saudis are cutting prices for a different reason.

There appears to be a direct battle underway among OPEC members for market share in a pricing environment increasingly defined by unconventional (shale and tight) reserves.

The move suggests that the biggest member of OPEC is prepared to let prices fall rather than cede market share by paring output to clear a supply surplus, according to a comment from Commerzbank, the Frankfurt-based global banking giant.

Usually, the Saudis act in the other direction. In the past, Saudi Arabia has acted to stop a plunge in prices.

In 2008 and 2009, the Saudis made the biggest contribution to OPEC’s production cuts of almost 5 million barrels a day as demand contracted amid the financial crisis.

Today, the kingdom would need to reduce output by about 500,000 barrels a day to eliminate the supply glut caused by the highest U.S. output in three decades, according to several analysts.

The Kingdom Strikes Back

Aramco reduced official selling prices, or OSPs, for all grades of crudes to all regions for November. It lowered the OSP for Arab Light to Asia by $1 a barrel to a discount of $1.05 to the average of Oman and Dubai crude, the lowest level since December 2008. OSPs are regional adjustments Aramco makes to its pricing formulas to compete against oil from other countries.

Indications are that the Saudis intend to keep output steady until the end of the year, near the 9.6 million barrels a day extracted in August and September. However, that did follow the largest Saudi cut in almost two years made in August, according to the Saudi data provided to the OPEC Secretariat in Vienna at the time.

Refraining from further cuts would preserve the volume of Saudi Arabia’s oil sales, curb revenues for competitors, and discourage production of U.S. shale oil.

That’s because a further decline in crude oil prices would make some production in the U.S. unprofitable, preserving Saudi exports at the expense of American shale operations.

At the moment, most of my contacts are of the opinion this is less a Saudi attempt to punish others (as was the case in the mid-1980s), but more of an attempt to compensate for the falling cost of Atlantic basin-sourced crude.

The decision to reduce OSPs is in line with declining crude prices, leading some knowledgeable observers to conclude it is no more than a “mechanical aspect; if [raw material] prices fall customers wouldn’t understand why you’ve maintained higher OSP,” one noted.

However, this does point to a major change in the way oil is moving. For some time now, OPEC has not attempted to dictate price. That’s really beyond its ability, since it controls less than 42% of the world’s daily availability.

Rather, each month it calculates the global demand, subtracts volume coming from others, and then determines “the call on OPEC.” That “call” is then divided among the various monthly quotas for the cartel members.

In short, this has become a supply issue.

But in the process, it has lost control over pricing power, prompting some to conclude that the Saudi moves will ultimately lead to lower prices in the longer term.

So long as the emerging pricing band is stable and in the $85-$95 a barrel range, the prime beneficiary may still be U.S. domestic production.

That’s true whether the Saudis cut prices again or not.

Source : http://oilandenergyinvestor.com/2014/10/calculated-saudi-move-aimed-america/

Money Morning/The Money Map Report

©2014 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules