Morgan Stanley’s call of $35 per barrel was realized after oil traded below $36 on Friday. Goldman Sachs’ $20 prediction, due to the “endurance of the global oil surplus” could be the next target for this oil bear as the Saudi Arabia oil market kills profits.
$20 oil seems shocking, but history appears set to repeat itself. OPEC leader Saudi Arabia is committed to dealing a death blow to many western producers, and Russia.
* Click here to read our Volume from January of this year explaining the Saudis’ plot.
Saudi Arabia Oil Market | increases global oil market share
While the Saudis have been capturing market share during this bear market, they seem hell-bent on turning up the heat on specific producers, particularly Russia and America’s shale plays.
In a Bloomberg article from late-October titled Oil’s Big Slump Looks Like the 1980s ‘Lost Decade’ it becomes obvious the Saudis have been to this party before. Except in the 80s they were under the orders of Reagan to pump out oil in order to quell the Russian threat and bankrupt the rising power. That worked.
This time, in 2015, the same has been rumoured to be true, however the evidence suggests the Saudis have gone rogue.
In the article, Bloomberg Intelligence analyst Peter Pulikkan, wrote that:
“In 1985, Saudi Arabia changed policy to raise its market share, ushering in a lost decade for oil. There’s a possibility there’s another lost decade.”
While most analysts believe oil will stabilize into late-2016 and rebound significantly in 2017 and beyond, it’s prudent to take persistent volatility and potentially lower oil prices seriously, especially when considering the forthcoming facts: slow growth expected in China, all-time low velocity of money in the U.S., the global renewable energy mania (results of COP21 forthcoming – click here to read our related report) and the aging demographic shift in the West.
These factors will all weigh on crude oil demand in the next decade.
Saudi Arabia controls global oil market
Saudi Arabia has come out and said it will support output cuts as long as some of the largest oil producing countries in and outside OPEC do the same. In other words, unless Russia and possibly even the US obey its demands, it won’t be cutting anytime soon. News of this sent oil below $40 last week.
Saudis’ motives darken to take market from Russia
There is a dark timeline associated with the Saudis‘ recent actions and posits some troubling alliances in the Middle East.
On December 2nd, British parliament voted 397 to 223 to approve airstrikes in Syria. Britain initiated the bombing campaign against ISIS the next day.
Immediately following the new British bombing campaign, in a surprise move, the Saudis announced they would not be cutting oil production, but may increase output. Saudi Arabia put forward a ‘ceiling-less’ plan in a bid to capture market share from its competitors, namely Russia and Iran.
Who has entered the fight against ISIS recently and actually been effective? Russia.
Below is an excerpt from a Bloomberg article titled OPEC Unity Shattered as Saudi-Led Policy Leads to No Limits:
“…the Organization of Petroleum Exporting Countries tossed aside the idea of limiting production to control prices. Instead, it went all in for the one-year-old Saudi Arabia-led policy of pumping, pumping, pumping until rivals — external, such as Russia and U.S. shale drillers, as well as internal — are squeezed out of market share.”
Again, this is reminiscent of the Saudis move in the mid-80s to capture market share from Russia. Check out the steep decline in oil prices during the mid-80s below. The oil bear of the 80s lasted nearly 5 years.
While the Saudis want oil market share, and that is the primary motive behind their actions, it should be noted that their empathy towards ISIS has been speculated on for some time.
In a December 7th article from RT titled ‘Time of looking away over’: Germany warns Saudi Arabia to stop funding radical Islamists, it was reported that Germany publicly warned Saudi Arabia against financing religious radicalism around the world.
Saudis crush Iran in OPEC meeting
Who is another OPEC member desperate to generate revenues that has also been fighting ISIS in recent months? Iran.
*We’ve written about Iran and Saudi Arabia’s dislike of one another in great detail. Click here to get caught up.
The Saudis move to flood the market with oil, removing any ceiling, has left more than a few OPEC
members in dismay. But none felt it more than Iran…
Reuters reported this week that, “In a move sources say was masterminded by Saudi Arabia, ministers finally agreed for the first time in decades to drop any reference to the 13-member group’s output ceiling.”
Iran’s push for higher oil prices and larger market share is critical to its economic resurgence. Its current fragile position was further revealed in thatReuters report from earlier this week:
“The pivot, which surprised not only markets but also some OPEC officials, appeared to be a direct response to Saudi Arabia’s arch-rival Iran, which has made clear it intends to make a rapid return to global oil markets next year as nuclear-related sanctions are lifted.
With Tehran looking to pump as much as 1 million barrels per day (bpd) more crude into a market already saturated with excess supply, an increase of about 1 per cent in world supply, maintaining or legitimizing any pretence of OPEC limits – no matter how notional – was not an option for Riyadh.”
Saudi Arabia’s Plot to win global oil market
Saudi Arabia produces the cheapest oil in the world. It has long-term supply agreements in place and will add to them if oil prices stay depressed for much longer.
In the the 60s, Saudi Arabia led the creation of the OPEC cartel to defend itself and gain control over the global market for its only substantive export. It has always been a very self-serving nation with few friends. And now, once again thanks to its self-serving interests, Saudi Arabia is on the verge of disbanding the OPEC cartel it was responsible for creating.
“Saudi Arabia has long insisted it would cut production only if fellow OPEC members and non-OPEC countries joined in. The report quoted a senior OPEC delegate as saying the Saudis would agree to cuts if Iraq freezes production rises and Iran and non-members such as Russia, Mexico, Oman and Kazakhstan contribute.”
With everyone from the US to Russia and Iran trying to get a piece of the oil pie, amidst anemic global growth and weakening domestic economies, don’t expect this oil glut to diminish for at least a year. Oil investors should brace for a rocky 2016 as Saudi Arabia, a rogue state, attempts to squeeze competitors out of the market, exactly what it did in the 1980s; except this time it’s doing it on its own accord, not as a favour to America.
So what about poor little Canada? Inadvertently the Saudis have thrown down the gauntlet on Canadian producers as well. And there is just no way they can compete in this climate.
Canada must cut costs to compete in global oil market
When it comes to Canada’s energy sector the pain is likely not over, but the silver lining is that some oil companies are becoming more efficient than ever before.
The Financial Post reported on December 9th that Suncor Energy’s operating costs at its oil-sands operations fell to $27 a barrel in the third quarter. Cenovus Energy’s operating costs at its Christina Lake site is less than $10 a barrel and its conventional oil costs are just over $15 a barrel.
Look for mass consolidation in Canada’s energy sector in 2016 as a way to prevent extinction. Although not a target of the Saudis’ economic war, Canada’s oil patch will continue to be among the hardest hit.
All the best with your investments,
PINNACLEDIGEST.COM
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