by Lady Michelle Jennifer Santos
Crude oil is getting crushed and Saudi Arabia is laughing at U.S. especially after this weekend.
On Monday morning, the price of West Texas Intermediate crude oil was down more than 4% to trade back below $US49 after crude had another wild week in which prices finished lower after trading as high as $US54 a barrel.
The drop in oil price comes after the number of US oil rigs were shutting down on Friday following the price slump less than the prior week.
Another trigger for the price decline was the restarting of a pipeline in Libya that had been out of service due to a fire, which Bloomberg News reported on Monday.
Here’s the horrific screenshot of early drop in oil prices. Compare that to the summer 2014 spike to $115 per barrel.
Oil prices have fallen drastically the last few months and based on past history, Saudi Arabia, who has long been the only real oil producer in the world with a very large oil production capacity and has latent “spare capacity” reserved for times of need, would (and should) normally ramp up or down its production at a moment’s notice to stem the oil price decline.
So what on earth is going on that they are not doing anything?
To take on U.S. and its pride.
The world’s largest net importer of crude oil is now China, a crown the US was not unhappy to give up at all. As a response, U.S. increased its domestic production which meant the Americans are buying less from the global market leaving China with more clout and negotiating leverage.
But it is two-edged: The Chinese demand at present is not quite what it used to be because of currency. A stronger dollar is weakening the oil price too.
As retaliation, Saudi devised an unexpected strategy: Aramco, Saudi Arabia’s national oil company, stirred things up not by cutting production, but by lowering the price of its flagship Arab Light crude oil for Asian contracts by $1 per barrel.
Organisation of the Petroleum Exporting Countries (OPEC) member Iran didn’t like the idea, but they followed their great rival in cutting their sale price too.
The rest then followed and to this day have no intentions of letting up the member cartel’s strategy of allowing the cost of a barrel to plummet. Venezuela, on the other hand who opposed the cartel’s decision in November to keep production levels unchanged, have failed in changing Saudi and its Gulf compadres’ mind.
The UAE, Saudi Arabia, Kuwait and Qatar form a core of Gulf Arab oil producers who dominate OPEC policy due to their overwhelming oil reserves and production capacity. Combined, these four account for almost two thirds of the cartel’s production of around 30m barrels per day (bpd) of crude.
“The strategy will not change,” said Suhail bin Mohammed al-Mazrouei, speaking in Abu Dhabi. “We are telling the market and other producers that they need to be rational.”
Mr Mazrouei added that it could take years for prices to stabilise, adding: “We are passing through very interesting times…it is unlikely that we will see a sudden rise [in oil prices].”
Tensions are mounting within OPEC, however, as many of the groups members watch their economies, which depend on $100 oil, are now deep into recession.
“Those that have planned to decrease the prices against other countries will regret this decision,” Rouhani said in a speech broadcast on state television as oil plunged to near six year lows on international markets.
“If Iran suffers from the drop in oil prices, know that other oil-producing countries such as Saudi Arabia and Kuwait will suffer more than Iran,” he added.
Meanwhile, UK inflation fell to the lowest level on record in January as the sharp drop in global oil prices fed through to petrol pumps and food prices continued to fall amid a supermarket price war.
Economists say a “brief period of deflation is imminent”.
If the Saudis are wanting to crush US shale oil industry, they are doing a great job for two simple reasons: Geology and Employment.
Unlike traditional oil drilling, shale oil taps out very quickly.
There is also a slowdown which was already projected since December 2014 to effect the state budgets of Texas, Wyoming, Louisiana, Oklahoma, North Dakota and Alaska. The layoffs have been felt by the thousands.
Furthermore, lower prices also hurt western exploration and production (E&P) companies’ revenues immediately, with most of the drop falling straight to the bottomline because of their high operating leverage, says Steve Wood, managing director at Moody’s.
As for the eco-friendly groups, there is not much to celebrate in the alternative energy sector either. Alternative energy stocks have gotten hammered, along with other energy stocks as they are a leveraged play on the energy sector as explained here.
Shale production is much more expensive than traditional oil from the Arabian Peninsula. More importantly, small and mid-sized companies, with impatient shareholders, cannot wait out a price collapse the way Saudi Aramco can.
The one who is so far winning in this strategy is Saudi Arabia who is playing the market with astuteness because they have a substantial stock of assets that would enable it to withstand lower oil prices for a sustained period without necessarily needing to borrow or tighten policy.
Shale producers do not have a $700-billion-dollar fund they can tap into to stay afloat.
Perhaps U.S. Republicans and their followers shouldn’t be celebrating nor pushing fracking at all. All shale oil has given the country so far is contaminated water, hardship and more job loss, not prosperity.