Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Global Warming ClImate Change Mega Death Trend - 8th Apr 24
Gold Is Rallying Again, But Silver Could Get REALLY Interesting - 8th Apr 24
Media Elite Belittle Inflation Struggles of Ordinary Americans - 8th Apr 24
Profit from the Roaring AI 2020's Tech Stocks Economic Boom - 8th Apr 24
Stock Market Election Year Five Nights at Freddy's - 7th Apr 24
It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- 7th Apr 24
AI Revolution and NVDA: Why Tough Going May Be Ahead - 7th Apr 24
Hidden cost of US homeownership just saw its biggest spike in 5 years - 7th Apr 24
What Happens To Gold Price If The Fed Doesn’t Cut Rates? - 7th Apr 24
The Fed is becoming increasingly divided on interest rates - 7th Apr 24
The Evils of Paper Money Have no End - 7th Apr 24
Stock Market Presidential Election Cycle Seasonal Trend Analysis - 3rd Apr 24
Stock Market Presidential Election Cycle Seasonal Trend - 2nd Apr 24
Dow Stock Market Annual Percent Change Analysis 2024 - 2nd Apr 24
Bitcoin S&P Pattern - 31st Mar 24
S&P Stock Market Correlating Seasonal Swings - 31st Mar 24
S&P SEASONAL ANALYSIS - 31st Mar 24
Here's a Dirty Little Secret: Federal Reserve Monetary Policy Is Still Loose - 31st Mar 24
Tandem Chairman Paul Pester on Fintech, AI, and the Future of Banking in the UK - 31st Mar 24
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

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

© 2005-2022 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