I don’t see it that way but that is what makes horse races.
KSA can’t manage single handedly to make up the declines in production at the current prices or any other low price environment below about $60 real. Under those prices there is little new production investment possible just about anywhere. Under current conditions, unless someone can pull 2 to 4 mmbo/d of production out of their hip pocket supply and demand converge in far less than a year with modest growth and decline rates of only 1%. Decline in production of 1% is very modest by historical standards and extremely unlikely when drilling stops as it has for all intents and purposes now.
By almost all estimates Iran has been producing and selling or using about 3.5 mmbo/d and their capacity in three years or so can rise to about 4 mmbo/d. I do not see that as a flood of the market.
Do you expect demand for oil to drop in favor of what?
We have reached a point where 1% either way represents nearly 1 mmbo/d in production. If the two happen at the same time the gap is soon diverging at 2 mmbo/d per year. That will create a price spike in short order. I can’t see demand dropping with prices this low and I can’t see KSA continuously pulling 1 mmbo/d in new production out of their hat on a regular pace. With prices this low they are about the only ones who can afford to do it IF they had the resources. Have they been keeping another Ghawar or two hidden from the whole world?
So why then is KSA hunkering down for a low price environment for a long time?
Agreed.
Under current conditions, unless someone can pull 2 to 4 mmbo/d of production out of their hip pocket supply and demand converge in far less than a year with modest growth and decline rates of only 1%.
Agreed.
Iran has been producing and selling or using about 3.5 mmbo/d and their capacity in three years or so can rise to about 4 mmbo/d. I do not see that as a flood of the market.
Agreed.
Do you expect demand for oil to drop in favor of what?
I don't expect a decline in demand. I expect growth, perhaps slower growth than the last 3 year average, but still growth.
I can’t see KSA continuously pulling 1 mmbo/d in new production out of their hat on a regular pace.
That would be unlikely, but also recognize over the past year, while drilling rigs have reduced worldwide, Saudi Arabia brought in more rigs last year.
So why then is KSA hunkering down for a low price environment for a long time?
I don't think anyone really knows how low, how long. I don't recall seeing anyone 18 months ago that predicted where we are today.
I see Saudi Arabia remaining in strength longer than many in OPEC, and prepared to recover faster than most in OPEC. If that is in 1 year or 2 years or 3 years, I think they will be ready with more capital to put back in than others.
I should have added, I also see Saudi Arabia preparing for a more extended price of $60~70 a barrel, rather than the ~$100 they needed to match past government spending.