How OPEC Weaponized Oil Prices Against US Drillers

MSN.com ^ | 09 January 2014 | Grant Smith

[zeestephen]

Representatives of Saudi Arabia, the United Arab Emirates and Kuwait stressed a dozen times in the past six weeks that the group won’t curb output to halt the biggest drop in crude since 2008...The global oversupply is 2 million barrels a day, or 6.7 percent of OPEC output, Qatar estimates.

[BRK]

All I know is that I wish I had a big underground tank as I would be filling it up at today’s prices.

I have been thinking if there is way to buy a long term futures contract at today's prices. I know airlines do this when prices are low. Anybody know any way to do this for the little guy?

[onona]

:)

[gattaca]

bmp

[nathanbedford]

The Saudis, although a closed and superstitious society, are well advised on matters affecting their sole source of income, the world oil market. They are also well advised about their primary religious rival, Shiite Iran, and its nuclear development program.

I do not understand why the Saudis, even if they despair of action by Obama to interdict Iran's getting the bomb, would believe that this policy of crashing the world oil price will effect that end. The regime in Iran is so committed to its policy of getting the bomb that will endure grave economic hardship to acquire it. Probably nothing short of crashing the regime will succeed and there is little evidence that crashing the price of oil will crash the Iran regime. That moment passed at the beginning of the Obama regime when he failed to speak out on behalf of of the people in the streets and support the overthrow of that regime.

If the Saudis are not trying to prevent Iran from getting the bomb, what are they up to? I believe they looked at the world oil market and concluded that a new technology was fundamentally transforming the market in a way that constituted a mortal threat to the existence of The House of Saud. Without their income from oil there is no Saudi Arabia as we know it today. But horizontal drilling and fracking and to a lesser degree alternative energy sources have presented a real threat to oil market and prices at a level which will sustain Saudi Arabia. The threat is not so much today, although that is real, but the trajectory of massive increases in the quantity of oil worldwide (not to mention gas) paints a graph which is destructive to Saudi Arabia.

So new technology combined with a worldwide slowdown in demand caused by slow growth forcing the Saudis to peer into the future. They conclude as this analyst says, let us demonstrate that there is great risk in capital expensive extraction methods like fracking and in unrealistic alternative energy sources by bankrupting those high cost producers. The Saudis conclude: Let us change the angle of the trajectory on the graph. Let us change this angle by reducing the price of oil to a level which hurts us but does not bankrupt us because we are the world's lowest cost producer of the sweetest crude but which will discourage the very rapid application around the world of fracking. We can gain time. We can hope that increased economic demand will increase the price of oil. So long as the high cost producers are mortally wounded and we are only marginally affected, we are better off.

If the Saudis conclude that teaching the fracking market a lesson is worth the price their policy makes sense. And it makes sense to them if they believe that the lag in ramping up production by fracking and horizontal drilling, hugely expensive and capital-intensive, caused by this depression in the price of oil will be of sufficient length in time to be worthwhile. The oil patch will have to regroup, especially in the fracking space, and convince capital markets that this time will be different, this time the Saudi's will not bankrupt them. Investors will have to believe that the growth in oil prices and the long term stability of those prices warrant the risk. Under this scenario, the Saudi's buhimy a lot of time.

[Paul R.]

That’s not really true. If the rest of OPEC dropped production by 20%, Saudi probably could not make it up, at least not in the short or medium term. Saudi is pretty close to “maxed out” production, and has been for a while, making only modest efforts to increase production. Additionally, internal consumption is rising rapidly, cutting into potential export capacity. Note that Saudi Arabia is roughly 31% of OPEC production. (That figure may actually be lower for 2014, as Iraq’s production is growing.)

In order of importance, I believe Saudi Arabia’s goals are:

1) Choke Iran, and to a lesser degree, Iran’s pal, Russia.

2) Maintain present market share.

3) Restrain growth of U.S. production by forcing out some marginal U.S. producers.

4) Create their own value added hydrocarbons industry for the long term (ie., products like plastics, etc.) It makes little sense to halve the time their reserves would last, if such industry is a goal.

Good data here: http://www.eia.gov/countries/country-data.cfm?fips=sa

[PCPOET7]

I agree with you but the thing that I think Obama does not understand is that the new tech for the wills allows for the turning on and off of the spigot so if a will is no longer profitable the oil company can just turn it off till the price goes up and it is profitable again. it use to be real expensive because capping a will was expensive and you would have to dwell a new will if you wanted to tap back into the field..

I am no expert so If I am wrong on this someone please let me know.

[Paul R.]

I can agree with much of what you postulate. However, while Saudi Arabia may not be able to force regime change in Iran, they can weaken and slow Iran, making it less able to defend itself from a pre-emptive strike by Israel (with Saudi help?) Here, as with the oil, this helps buy time. I would not be at all surprised to find that Saudi might work with Israel on missile defense. (Israeli expertise + Saudi funds.) Economic hardship might also reduce the number of nukes Iran can produce, improving the chances that, if it came to it, perhaps only one or two Iranian nukes could get through.

Further, Saudi Arabia has embarked on a VERY substantial military buildup, far greater than anything needed to quell internal rebellion. Draw your own conclusions.

[SunkenCiv]

Russia’s getting sent down the dumper by the House of Saud. So is Russia’s ally and would-be nuclear power Iran, and Iran’s missile customer Venezuela.

Keystone XL pipeline presents a political predicament
http://www.freerepublic.com/focus/news/3245597/posts

[puppypusher]

If we had a government with some balls they would place a tariff on oil priced below the market average.OPEC is trying to destroy our oil industry and we as Americans shouldn’t allow that for economic as well as national security reasons.

[Wonder Warthog]

"Hopefully our government is taking advantage of the current glut in order to top off strategic reserves."

In an OBAMA administration?? More likely they are selling off the reserve contents as fast as possible.

[woodbutcher1963]

One thing you left out was SA wants to also hurt Russia.
Russia is their main competition when it comes to delivering oil to Asia. They look at China and India as the real growth markets. Russia is also the competition to Europe for natural gas. Russia supports Syria, where the pipeline from the middle east would need to traverse to get to Europe. Qatar and Saudi Arabia have been supporting the rebel forces in Syria just so they can get the pipeline built. Of course, Iran is their other rival on the natural gas coming out of the gulf and going to Europe. So by pushing the price of oil down not only does it slow the growth in worldwide tracking, it hurts their enemies on multiple fronts. They are fighting for the control of energy sales on a global basis.

[woodbutcher1963]

FRACKING not tracking

Darn you autocorrect.

[zaxtres]

Wrong, Saudi is “officially” Sunni and takes marching orders from the Wahabi’s. If it were not for the Wahabi’s, the House of Saud would have lost their heads long ago. The people of KSA still practice crucifixion, until the 1980’s still taught the Earth was flat, have religious police that walk the streets to give a beat down to anyone on a whim, sends girls running out of a burning school without head scarves back in, etc. For those who do not know Islam, Wahabi’s and the rest of the ilk not on every page of our media because it is ISlam, will think the KSA to be “moderate”. There is no such thing as a “moderate” muslim. Never has been and never will be. Just like there is no such thing as: “Islam was hijacked”, “radical muslim”, “extremist muslim” “Radical Islam” “extremist Islam” and/or “Palestinians”. By saying that the KSA is officially “moderate” then you too have capitulated to the West’s PC of Islam. Go do your research before you make benign claims about any Islamic country again. KSA is made of a people who when you say “tribal mentality” are actually tribes because they are originally Bedouin and nomadic.

[woodbutcher1963]

5) Restrain the spread of FRACKING and horizontal drilling to other areas of the globe. The US is not the only country the has shale plays. I have read about areas in China, Argentina among others.

[nathanbedford]

I quite agree with you concerning Russia. The competition from Russia will be severely curtailed if the combination of sanctions and falling oil prices forces the Russian government to take confiscatory measures to protect the ruble. If Russia attempts to control the export of hard currency or confiscate profits of oil drillers expect capital markets for Russia to really dry up even beyond what is already required for sanctions.

Putin is being reduced to fewer and fewer options. In order to maintain his control which has been funded by the extraction industries, he might be forced into confiscatory measures or higher taxes or some combination. Once that happens, confidence from the West will disappear and he will be left with China as a sugar daddy. The Chinese will not roll over; they will get their pound of flesh.

The good news in that scenario is that it is likely to destroy any hopes of a German Russian alliance.

[woodbutcher1963]

NY Mercantile Exchange. You will need to open an account with a seated broker. Typically they want you to deposit at least $5000. You can then buy call options or just a futures contract as far out as 2-3 years.

[Neidermeyer]

I believe 0bama cut a deal with his Arab brothers to crash oil prices to harm Putin, while simultaneously killing our domestic oil producers in the US
*************************
AGREED ,, Obunghole learned from Jimmy Carter... who created the Energy department to hobble energy production here while the Sauds lowered prices and killed domestic production here in the emerging oil sands industry. He’s getting a twofer with a short term cap on Iranian ISIS moneyflows.. Putin is colatteral damage... we need to resolve the eastern European CIA/Putin war now diplomatically.

[Eric in the Ozarks]

In any 50-50 deal with China, the Chinese get the hyphen.

[central_va]

Peak Oil™ bump.

[Does so]

All I know is that I wish I had a big underground tank as I would be filling it up at today’s prices.

Diesel would last longer than gasoline.

Celebrity John Denver had one during the last fuel crisis, and was excoriated because of it.