Tom Kirkman

Saudi Arabia cuts May oil prices to Asia, raises US rate after Opec+ deal

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6 minutes ago, wrs said:

When you and others continue to repeat this you diminish your perception of the oil market.  KSA isn't the only producer, they only export 7-8mmbbl/day in a 100mmbbl/day market.  That is 7-8% of the total oil market.  They simply cannot flood the whole market or even come close.  They also can no longer constrain the market on their own because of shale and that is what they don't like.  Their attempt to flood the market can only affect the price at the margin and they don't produce enough to have a long lasting effect.  They won't be able to keep the price low on their own, the COVID mess is what's causing the low prices and no, KSA can't handle this.

WRS, I'm sorry I oversimplified. Yes, OPEC's pricing silliness is currently irrelevant due to the pandemic as I said and as you said. No, All of OPEC+ taken together cannot meet current (pre-pandemic) demand. My "free-market" argument must be taken in context. If there had never been a cartel, then we would currently have a free market, and price would rise until demand meets supply. The producing countries would have continued to expand their production in competition with each other, and higher-cost fields would never have been exploited until that low-cost production began to decline.  Exactly where this price would currently be, I don't know, but it would almost certainly be below the current average cost of shale. In the real world, shale finally broke the back of OPEC, and that's why they are panicking. But this just means that the price can finally respond to the market and will stabilize at the marginal cost of the guy who pumps the last profitable barrel every day. That will be way the heck below KSA's $80/bbl dream. My ignorant guesstimate is that in today's world, that barrel will cost $40 and will be pumped in the Permian.

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47 minutes ago, Dan Clemmensen said:

My ignorant guesstimate is that in today's world, that barrel will cost $40 and will be pumped in the Permian.

Oil has always moved not in cycles but in super-cycles. This is partly due to free market oil competing with cartels. But part of it has to do with being a commodity--instability and volatility run in the family. 

Right now we're all pushing against a string--there's nowhere to go with crude oil but typically, as now, the Saudis can't seem to understand that. They think, as we talk, that oil demand is going to bounce right back but shale won't. This is the second time they're run this lab experiment and MbS thinks he'll get a different result because the Saudi oil minister was weak the first time. 

We're setting the stage for the spike that MbS so wholeheartedly expects (otherwise he wouldn't be buying shares of the Europe Big Four). Except that this super-cycle will involve shale, and therefore the oil spike won't be near what MbS expects. My guess is that profound instability is coming to the ME. The prince has really done it this time: he just thought the Iranians hated him before. But now he has also stuck a finger in the US eye--and during a pandemic. The UAE is politically distancing from him. In short, the KSA is losing power and is left with no semblance of respect by other nations/states.

Still, he has created an oil shock, but the US also participated. We'll see a counter-shock. In 2021-2022, we should see WTI of about $60. The spread between WTI and Brent will likely revert to about $5, the longterm tradition, so MbS (or whomever replaces him) will sell their oil at about $75. With a little belt-tightening, he can get along with that. 

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