Best of the Week
Most Popular
1. 2019 From A Fourth Turning Perspective - James_Quinn
2.Beware the Young Stocks Bear Market! - Zeal_LLC
3.Safe Havens are Surging. What this Means for Stocks 2019 - Troy_Bombardia
4.Most Popular Financial Markets Analysis of 2018 - Trump and BrExit Chaos Dominate - Nadeem_Walayat
5.January 2019 Financial Markets Analysis and Forecasts - Nadeem_Walayat
6.Silver Price Trend Analysis 2019 - Nadeem_Walayat
7.Why 90% of Traders Lose - Nadeem_Walayat
8.What to do With Your Money in a Stocks Bear Market - Stephen_McBride
9.Stock Market What to Expect in the First 3~5 Months of 2019 - Chris_Vermeulen
10.China, Global Economy has Tipped over: The Surging Dollar and the Rallying Yen - FXCOT
Last 7 days
S&P 500 at Resistance Level, Downward Correction Ahead? - 17th Jan 19
Mauldin: My 2019 Economic Outlook - 17th Jan 19
Macro Could Weaken After US Government Shutdown. What This Means for Stocks - 17th Jan 19
US Stock Market Indexes Reaches Fibonacci Target Zone – Where to Next? - 17th Jan 19
How 2018 Was For The UK Casino Industry - 17th Jan 19
Gold Price – US$700 Or US$7000? - 16th Jan 19
Commodities Are the Right Story for 2019 - 16th Jan 19
Bitcoin Price Wavers - 15th Jan 19
History Shows That “Disruptor Stocks” Will Make You the Most Money in a Bear Market - 15th Jan 19
What Will the Stock Market Do Around Earnings Season - 15th Jan 19
2018-2019 Pop Goes The Debt Bubble - 15th Jan 19
Are Global Stock Markets About To Rally 10 Percent? - 15th Jan 19
Here's something to make you money in 2019 - 15th Jan 19
Theresa May to Lose by Over 200 Votes as Remain MP's Plot Subverting Brexit - 15th Jan 19
Europe is Burning - 14th Jan 19
S&P 500 Bounces Off 2,600, Downward Reversal? - 14th Jan 19
Gold A Rally or a Bull Market? - 14th Jan 19
Gold Stocks, Dollar and Oil Cycle Moves to Profit from in 2019 - 14th Jan 19
How To Profit From The Death Of Las Vegas - 14th Jan 19
Real Reason for Land Rover Crisis is Poor Quality of Build - 14th Jan 19
Stock Market Looking Toppy! - 13th Jan 19
Liquidity, Money Supply, and Insolvency - 13th Jan 19
Top Ten Trends Lead to Gold Price - 13th Jan 19
Silver: A Long Term Perspective - 13th Jan 19
Trump's Impeachment? Watch the Stock Market - 12th Jan 19
Big Silver Move Foreshadowed as Industrial Panic Looms - 12th Jan 19
Gold GDXJ Upside Bests GDX - 12th Jan 19
Devastating Investment Losses Are Coming: What Is Your Advisor Doing About It? - 12th Jan 19
Things to do Before Choosing the Right Credit Card - 12th Jan 19
Japanese Yen Outlook In 2019 - 11th Jan 19
Yield curve suggests that US Recession is near: Trading Setups - 11th Jan 19
How Unrealistic Return Assumptions Are Ruining Your Stocks Portfolio - 10th Jan 19
What’s Next for the US Dollar, Gold, Stocks & Bonds? - 10th Jan 19
America's New Africa Strategy - 10th Jan 19
Gold Mine Production by Country - 10th Jan 19
Gold, Stocks and the Flattening Yield Curve - 10th Jan 19
Silver Price Trend Forecast Target for 2019 - 10th Jan 19

Market Oracle FREE Newsletter

Bitcoin Analysis and Trend Forecast 2019

Saudi Move to Cut Oil Prices Is Now Russia's Biggest Economic Threat

Commodities / Crude Oil Oct 24, 2014 - 01:15 PM GMT

By: Money_Morning

Commodities

As I discussed recently (Why the Saudis Are Cutting Oil Prices), Saudi Arabia has made headlines by cutting oil prices, not production.

It seems the Saudis are more interested in grabbing market share than in attending to the present state of the market.

That move seems calculated to undercut the effect the United States has on global oil markets, even though that effect is indirect.


But make no mistake: Russia is the country that will suffer the most as oil prices drop.

Thanks to the Saudis, this could get ugly very quickly for Putin…

Growing Supplies and Falling Prices Hurt Russia the Most

Up until now, Russia was in a strong position, with the ruble trading at more than 41 to the dollar, an all-time high.

But what's propping that price up is oil. You see, 60% of Moscow's central budget is dependent on the international sale of oil and natural gas.

And the 2015 budget projections from the Kremlin are based on oil at$90 to $95 per barrel.

With the current price (West Texas Intermediate) around $82, and dipping below $80 intraday, that budget collapses.

How Low Can Oil Prices Go?

There's a lot of jawboning going on these days about how far oil prices will fall before a floor forms. Not too long ago, we were having a similar conversation on the expectation that prices would be moving higher.

How quickly things change.

The essential fallacy in all of this is the patently false assumption in the background. Most projections assume that whatever movement is taking place now will continue into the future.

Oil went up last week? Then it will go up again this week. And the week after. That's the fallacy.

Retail investors can't think like that. They need to take the long view. It's the flash boys that gyrate stock and commodity prices in the short-term to wrestle marginal profit.

And what is happening currently with oil prices has nothing to do with the long term.

In fact, these days the average investor in energy prospers by setting up a strategy with specific companies, not by following broad sector trends and daily gyrations.

However, one traditional consideration has resurfaced as a result of the current extreme volatility.

Focusing on the staple supply/demand connection is back. But in the case of oil, it has a decidedly geopolitical look about it.

It's the supply side of this equation that's driving prices right now. Here's why.

First, it is true that the rise in U.S. unconventional production (shale and tight) has changed the dimensions of global supply. But is it also true that, until Congress changes regulations prohibiting crude exports, that largess has no impact on international trading markets.

The United States is now the largest exporter of oil productsin the world, but that has only a very indirect influence on how domestic production's influences global trading trends. The phase-in of similar production elsewhere in any significant amount is years away. That has no bearing on current prices.

Meanwhile, more production at home means less imported crude is needed. Yet that decline has been ongoing for some time. It is not, therefore, a factor bearing on why the currentprice is hovering about $80 a barrel in New York.

The tension levels in Iraq and the broader MENA (Middle East North Africa) region, as well as Ukraine and Hong Kong, have yet to translate into any genuine concern over oil. They could very well, of course, but have not yet for one simple reason.

As of now, the Saudis may have accomplished more to economically attack Russia than all of the Western sanctions over Ukraine put together. That is, provided the Saudi price discount remains for any length of time.

The battleground here between Saudi Arabia and Russia is in Asia. As I have noted several times, the international energy balance is tilting toward Asia and will be accelerating in that direction at least through 2035.

Traditionally, Asian end users would pay a premium for Saudi crude, that is, a higher price than Europe or North America would be charged for the same amount.

However, with the opening of the East Siberia-Pacific Ocean (ESPO) pipeline, which stretches 3,018 miles from Russia to China, Russia is competing in the world's fastest-growing energy market with better quality oil at a lower price. Saudi oil has a higher sulfur content than ESPO (Moscow is developing a benchmark crude rate using the same name as the pipeline).

By lowering its price to Asia, the specific focus of the Saudi action, Riyadh directly undercuts the Russian competition.

Ok, so that may be the real reason for the pricing tactic, but what does that have to do with OPEC as a whole?

Just this – other members of the cartel have been overproducing and selling well beyond their monthly quota. In fact, the last figures compiled by the OPEC Secretariat in Vienna (as of the end of August) indicated the deliberate overproduction was coming in at almost 450,000 barrels per day.

That is the internal target sought by Saudi Arabia.

Overproduction and continued excessive sales by countries like Kuwait and Venezuela are also playing into the supply glut and lowering aggregate prices. Making the excess unprofitable would redress the imbalances within OPEC.

That comes at a price, and some of the members may not accept it because they are now more dependent than ever on crude sale to sustain increasingly unsupportable domestic budgets. Local spending has been the primary way MENA OPEC members have contained a spreading "Arab Spring," while in Venezuela the economy survives only because of government hand-outs.

The vicious cycle has chained these countries to dependence on crude oil sales. Oil may be declining, but that dependence on this one resource has made it difficult for them to diversify their revenue sources.

Excessive sales demand even more excessive sales to keep their economies afloat.

These countries will remain rentier states (living off the surplus of natural materials without increasing the value of the land itself), and that cycle will make matters even more contentious as we move forward.

And then there is the prospect of an agreement between Iran and the West, opening up competition from Tehran, and the Iraqi intent to increase exports despite an expanding civil war. Iran and Iraq are also OPEC members, but have been unable to reach a monthly quota level (Iran) or have not had one for over a decade (Iraq). Changes here will destabilize what is left of the OPEC balance.

That means two things. First, the genuine influence OPEC has on oil prices will depend on its ability to get its own house in order. Second, the real battle within the cartel has not even started yet.

But the battle with Russia has already begun.

More from Dr. Kent Moors: Making money in the energy sector is no longer pegged to higher oil prices. But it does require a different approach. This is the best way to profit from crude oil prices right now…

Source : http://moneymorning.com/2014/10/22/saudi-move-to-cut-oil-prices-is-now-russias-biggest-economic-threat/

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