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Cartel Games
Saudis Do Nothing While Crude Prices Plunge

It’s a good time to buy a barrel of oil. Prices have dropped precipitously in recent weeks for a host of reasons, including slackening demand in Europe and Asia and a gush of new production from North America (thank you shale) and Libya. But low oil prices pose a threat to the world’s petrostates, which rely on the sales of crude to keep their governments afloat. The specific price these nations require—called the breakeven price—varies, but rest assured that OPEC is not anxious to see oil lapse into a bear market.

The cartel’s usual play in these situations is to constrict supply. Saudi Arabia, the largest OPEC producer, typically leads these cuts in production, but thus far hasn’t done so—rather, it has discounted the price at which it sells its crude to Asia. While it’s difficult to say why, exactly, Saudi Arabia hasn’t reduced production, analysts believe it has to do with intra-cartel posturing ahead of a November meeting. The FT reports:

“[The Saudis] are making a statement by cutting prices. Market share is more important than the price of Brent right now. If prices fall too low, they may decide to cut, but it is not yet a panic moment” [said Laura El-Katiri, a research fellow at the Oxford Institute for Energy Studies]. “This is a commercial decision they are making.”

But, as Bloomberg reports, some still expect Saudi Arabia to resume its traditional role as the cartel’s chief crude curtailer soon, in order to stave off further price drops:

“I don’t think there’s any rush on the Saudis’ side to bring the market lower” when disappointing demand could do that anyway, Francisco Blanch, head of commodities research at Bank of America Corp., said by phone from New York on Oct. 7. “…Saudi Arabia will cut if needed.”

In the meantime, the Saudis get to keep up pressure on Iran, which has a much higher breakeven price. Next month’s OPEC meeting will attract plenty of global attention—the price of oil is that important—so stay tuned.

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  • Fat_Man

    The Saudis have always been the lowest cost producer. They may be very happy to see the Russians who are backing Assad, and the Iranians take the hit.

    • Thirdsyphon

      Maybe. Also, they might be hoping to slow down the booming growth of American, European, and Chinese investment in shale oil extraction, at least temporarily.

  • Jacksonian_Libertarian

    This is all about the sectarian war going on between the Sunnis and the Shiites, the Shiites are much more exposed to falling oil prices than the Sunnis, hence the Saudi market share grabbing.

  • Jagneel

    Most societies you can list good things and bad. But Saudi Arabia is an exception. There nothing good about this society. They, the modern(?) Saudi Arabian society has invented nothing, made nothing. No contributions to Science (Ha!), no art (don’t even try unless you want to be beheaded), literature (sure to get your head handed over to you. literally!). Homosexuality is rampant but can get you beheaded as well. (It is not uncommon for a middle class Saudi man with a wife or wives and children to make straight sexual proposal to another man especially foreign man.) They are cursed with oil which keeps them bored and nothing to do. IF you are a young man in SA you have nothing to do except watch TV and order or harass your maids from third world.
    You can bomb the whole country to stone age, and humanity will be better not worse off.

  • Despiser_of_Libs

    Strange every election where Democrats are the incumbents oil prices always fall just before an election yet if its a Republican incumbent oil prices rise dramatically. Coincidence?

  • ChuckFinley

    There is also the fact that the US election is coming in a few weeks and the Saudis would like to see their friends the Democrats hold onto their Senate seats. After the election, the price of oil can go back up again. That news will get lost in the fact that Obamacare rates are set to rise dramatically after the election and all the other bad news that the Administration has been holding off until after the first week of November.

  • mojodomo

    Once a well is producing it will only be capped if it cannot cover its variable costs
    of production. While shale wells have high decline rates, declining
    prices do not offer even a sideways glance as slip below the point at
    which drilling a new well is a loser. Further, oil trades
    within a fairly broad band where the distance between the top and bottom
    of the band can be achieved by as little as a 3% change in daily supply or
    consumption. There is a good case that this present price slide may be a
    drawn out and ugly affair with much further to go – for the US oil and gas
    business, painful enough to require dramatic operational changes
    and different business models. Pump prices below $3 should not be too far away.

    • neshobanakni

      It’s been below $3 here for two weeks or more.

  • Richard

    Keep in mind that the cost of getting that oil out of the ground is much cheaper for the Saudi’s than it is for all the shale producers here in the US. Saudi Arabia might be willing to let the price drop enough to make it unprofitable for all this extra shale oil to be worked. They could easily take a temporary hit just to disrupt US production thinking that in the long term it would be worth it.

  • kurt9

    The Saudis are not dumb. They understand completely that the economics of oil production favor them over other regional producers such as Iran and Russia, as well as the emerging shale oil revolution. Naturally, they will price their oil to be right below the breakeven point for Iranian and Russian oil, but high enough to maximize their profits. China is now their biggest customer.

    Long term, they know they have to invest in deeper drilling technology for when the shallow Persian Gulf fields are depleted as well as create the sovereign wealth fund for their populace.

  • Robert What?

    Is it possible that the Saudi’s know something we don’t? Like their allies (i.e, the Obama Administration) are going to do something that will kill off US shale-oil production, so the Saudi’s can resume their position as king-of-the-hill. Or am I thinking too Machiavellian?

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