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
Stock Market DOW Seasonal Trend Analysis - 23rd Mar 19
US Dollar Breakdown on Fed Was Much Worse Than It Looks - 23rd Mar 19
Gold Mid-Tier GDXJ Stocks Fundamentals - 23rd Mar 19
Which Currency Pairs Stand to Benefit from Prevailing Risk Aversion? - 23rd Mar 19
If You Get These 3 Things Right, You’ll Never Have to Worry About Money - 22nd Mar 19
March 2019 Cryptocurrency Technical Analysis - 22nd Mar 19
Turkey Tourist Fakes Market Bargains Haggling Top Tips - 22nd Mar 19
Next Recession: Finding A 48% Yield Amid The Ruins - 22nd Mar 19
Your Future Stock Returns Might Unpleasantly Surprise You - 22nd Mar 19
Fed Acknowledges “Recession Risks”. Run for the Hills! - 22nd Mar 19
Will Bridging Loans Grow in Demand and Usage in 2019? - 22nd Mar 19
Does Fed Know Something Gold Investors Do Not Know? - 21st Mar 19
Gold …Some Confirmations to Watch For - 21st Mar 19
UKIP No Longer About BrExit, Becomes BNP 2.0, Muslim Hate Party - 21st Mar 19
A Message to the Gold Bulls: Relying on the CoT Gives You A False Sense of Security - 20th Mar 19
The Secret to Funding a Green New Deal - 20th Mar 19
Vietnam, Part I: Colonialism and National Liberation - 20th Mar 19
Will the Fed Cut its Interest Rate Forecast, Pushing Gold Higher? - 20th Mar 19
Dow Jones Stock Market Topping Pattern - 20th Mar 19
Gold Stocks Outperform Gold but Not Stocks - 20th Mar 19
Here’s What You’re Not Hearing About the US - China Trade War - 20th Mar 19
US Overdosing on Debt - 19th Mar 19
Looking at the Economic Winter Season Ahead - 19th Mar 19
Will the Stock Market Crash Like 1937? - 19th Mar 19
Stock Market VIX Volaility Analysis - 19th Mar 19
FREE Access to Stock and Finanacial Markets Trading Analysis Worth $1229! - 19th Mar 19
US Stock Markets Price Anomaly Setup Continues - 19th Mar 19
Gold Price Confirmation of the Warning - 18th Mar 19
Split Stock Market Warning - 18th Mar 19
Stock Market Trend Analysis 2019 - Video - 18th Mar 19
Best Precious Metals Investment and Trades for 2019 - 18th Mar 19
Hurdles for Gold Stocks - 18th Mar 19
Pento: Coming QE & Low Rates Will Be ‘Rocket Fuel for Gold’ - 18th Mar 19
"This is for Tommy Robinson" Shouts Knife Wielding White Supremacist Terrorist in London - 18th Mar 19
This Is How You Create the Biggest Credit Bubble in History - 17th Mar 19
Crude Oil Bulls - For Whom the Bell Tolls - 17th Mar 19
Gold Mining Stocks Fundamentals - 17th Mar 19
Why Buy a Land Rover - Range Rover vs Huge Tree Branch Falling on its Roof - 17th Mar 19
UKIP Urged to Change Name to BNP 2.0 So BrExit Party Can Fight a 2nd EU Referendum - 17th Mar 19
Tommy Robinson Looks Set to Become New UKIP Leader - 16th Mar 19
Gold Final Warning: Here Are the Stunning Implications of Plunging Gold Price - 16th Mar 19
Towards the End of a Stocks Bull Market, Short term Timing Becomes Difficult - 16th Mar 19
UKIP Brexit Facebook Groups Reveling in the New Zealand Terror Attacks Blaming Muslim Victims - 16th Mar 19
Gold – US Dollar vs US Dollar Index - 16th Mar 19
Islamophobic Hate Preachers Tommy Robinson and Katie Hopkins have Killed UKIP and Brexit - 16th Mar 19
Countdown to The Precious Metals Gold and Silver Breakout Rally - 15th Mar 19
Shale Oil Splutters: Brent on Track for $70 Target $100 in 2020 - 15th Mar 19
Setting up a Business Just Got Easier - 15th Mar 19
Stock Market Elliott Wave Analysis Trend Forercast - Video - 15th Mar 19
Gold Warning - Here Are the Stunning Implications of Plunging Gold Price - Part 1 - 15th Mar 19
UK Weather SHOCK - Trees Dropping Branches onto Cars in Stormy Winds - Sheffield - 15th Mar 19
Best Time to Trade Forex - 15th Mar 19
Why the Green New Deal Will Send Uranium Price Through the Roof - 14th Mar 19
S&P 500's New Medium-Term High, but Will Stock Market Uptrend Continue? - 14th Mar 19
US Conservatism - 14th Mar 19
Gold in the Age of High-speed Electronic Trading - 14th Mar 19
Britain's Demographic Time Bomb Has Gone Off! - 14th Mar 19
Why Walmart Will Crush Amazon - 14th Mar 19
2019 Economic Predictions - 14th Mar 19
Tax Avoidance Bills Sent to Thousands of Workers - 14th Mar 19

Market Oracle FREE Newsletter

Stock Market Trend Forecast March to September 2019

Why the Saudis are Fighting a Losing Battle Over Crude Oil

Commodities / Crude Oil Nov 07, 2014 - 10:27 AM GMT

By: Money_Morning

Commodities

Dr. Kent Moors writes: For the second time in a month, Saudi Arabia has grabbed the headlines in the oil markets. The kingdom is cutting prices again in its global oil feud.

In its latest version, Saudi Aramco (the national oil company) has restored an earlier price cut to Asia, but reduced its price to U.S customers.


That means the Saudis are now trying to fight a crude oil war on three different fronts: against Russia in Asia; with OPEC’s over-producers like Venezuela and Kuwait; and an escalating battle against U.S. unconventional (tight and shale) oil.

But its latest maneuver won’t be enough to turn the tide…

Potshots at Putin Over Asia

First, there’s the kingdom’s tangle with Russia.

The Russian front was the primary reason for an earlier move to slice $1 a barrel off the cost for customers in Asia – which has quickly become the biggest battleground for energy exports.

With the completion of the East Siberia-Pacific Ocean (ESPO) crude oil export pipeline, Moscow is now able to provide crude to Asia that’s better in quality (lower sulfur content) than the Saudi export blend at a lower price.

That move had an almost immediate impact on Russian export prospects, since there is now an alternative market for export that could offset a lowering of trade elsewhere. Russia’s central budget is also dependent upon oil and natural gas exports, and its 2015 budget is already pegged to much higher crude prices than the market is likely to provide.

With ESPO exports now about to move into high gear utilizing a spur to China that’s been underway for several years, it is crucial that the intended benchmark grade (also called ESPO) develop regular initial delivery cycles.

That’s what the Saudis managed to disrupt with their first pricing cut.

With Friends Like These Who Needs Enemies

The kingdom’s contest within OPEC is of a completely different nature.

Within the cartel, a multi-year dynamic continues even as members such as Iran and Venezuela press for a production cut. The truth is OPEC has not directly determined the global price of oil for some time now.

With less than 42% of the world’s daily production, there is simply too much oil on the market not under the cartel’s control. The U.S. and Russia are at top of the list of non-OPEC producers, meaning staggered pricing moves against both are hardly surprising.

Rather, the cartel’s production objectives are met by determining the volume on the supply side. OPEC first determines what the overall global demand will be, then deducts the production from the outside. The result is something referred to as “the call on OPEC,” which is then divided into monthly production quotas for each member.

That has created an ongoing tension inside the organization. The Saudi contest within the cartel has been against members who want to cut production (and thereby increase price), and are actually selling internationally above their determined quotas at the same time.

In this case, there is no stringent enforcement mechanism that compels members to comply with these quotas. That task has fallen onto Saudi Arabia as both the dominant OPEC producer and the world’s primary source of excess export capacity.

Normally, Riyadh balances the performance of others, occasionally cutting its own exports to offset excess sales from other members.

But those days are over. Saudi Arabia is using its clout to undercut the trade evasions of other members. In addition, it also has related supply concerns from other producers. Libyan volume will be moving back into the market after the latest round of domestic fighting there.

Then there’s the production in Iraq and Iran to deal with. Both are OPEC members. But Iraq has been without an official monthly production quota since U.S. military operations began in 2003. And despite its own domestic conflict with the insurgent Islamic State, Baghdad is poised to experience an expanding export flow.

Meanwhile, Tehran has been unable to meet its monthly OPEC export quota for some time, given the Western sanctions. Any breakthrough in negotiations on its nuclear program, however, could ease those sanctions and move a significant amount Iranian crude back into global networks.

Against this backdrop, the Saudis are facing a reduction in their own market share as prices decline. That double whammy is a big blow for an economy that is dependent on importing just about everything besides oil.

A No-Win Situation for the Kingdom

It’s the third front, however, that has developed into their greatest concern.

The U.S. had long been a main end user of imported oil until the rise of the shale age. Only a few years ago, almost 70% of what was needed in the U.S. came from imports. While Canada, Mexico, and even Nigeria (also an OPEC member) would usually provide the American economy with more crude on an average month, it was still the several million barrels a day controlled by Saudi Arabia that was instrumental in setting prices.

These days that flow is down to about 800,000 barrels, with prospects of an even further decline. It’s a direct result of the discovery of huge domestic tight and shale oil deposits in the U.S.

Those discoveries, in turn, have everybody talking about effective U.S. energy independence arriving in the next decade. The U.S. will still need to import about 30% of its daily needs, but virtually all of that will be coming from Canada.

The key to the amount of oil imported and where it comes from is the price. That’s the reason for the latest Saudi move.

By reducing the competitive price for oil, they are also prompting more expensive American unconventional production projects to be delayed or reconsidered entirely.

Ultimately, as with the move last month, the intended target remains American production.

Yet, such an objective is at best an indirect response. It’s currently only a contest over what the domestic mix of oil sourcing is inside the U.S. Washington hasn’t allowed crude oil exports for four decades, although more companies intend to categorize their production in such a way to allow its export now, with Congress likely to open up the export market even further in the near term. There are simply too many jobs and benefits thrown off to local tax bases from the export trade to not allow it.

The Saudis fear rising American competition in global markets is ultimately the real danger to both its pricing structure and its position as the world’s excess producer.

The current Saudi price cut will certainly have some very short-term impact, but ultimately it will not be successful. There are already a number of very inexpensive domestic fields emerging in the U.S. that can undercut any price put on imports.

If the price remains below $85 per barrel (a.k.a. the Saudi “comfort zone”), these efficient, low-cost American wells will simply gain an increasing percentage of the domestic market – not Saudi imports.

In its latest internal strategic plan, OPEC concluded several years ago, that no member would be selling a single barrel of oil to the U.S. by 2050. It’s just happening much faster than they thought, thanks to the new oil sources in the U.S.

It’s a battle the Saudis just can’t win.

Source : http://oilandenergyinvestor.com/2014/11/saudis-fighting-losing-battle-oil/

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

© 2005-2019 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