Bottom line - Adam Galas-Motely Fool - analysis of oil price dilema!
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Permalink Reply by Puzzled on
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r the us raises the fuel tax to subsidize our shale drillers so they can ride this out till the Saudis et al are forced to crank it down so we keep gas at 3 dollars,a gal. And ruin their plans
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Permalink Reply by Jim Litwinowicz on
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Most people believe that SA is trying to drive out the marginal shale producers and reduce production in the US. Many also believe that SA is engaging in an economic war with Russia, Syria, Iran and ISIS. And Venezuela is either an innocent victim in this war or is part of of a SA-USA conspiracy.
There is one more serious possible motive for SA, the one that I think is the most likely. Iraq has stated that they plan on increasing production by 2-3MBls/day in the next 2-3 yrs. Iran has also said that they will do the same since international sanctions against them have been eased. Russia also plans to step up production and has been investing heavily in new oil fields in Siberia. Add in further US shale production and there is a projected increase in global production of 8-10MBls/day in the next 3-4 yrs at a time when demand has leveled off if not slightly fallen. There is even more possible new production as Mexico privatizes its industry, Brazil does its deep water field, the Alaskan off shore fields come on line, Gulf of Mexico oil ramps back up after the Mocando blowout moratorium.
Perhaps SA is sending out a warning to these countries not to ramp up production. By driving down prices now, it will inhibit future exploration and production growth. Lower prices will make it much more difficult for Russia, Iran, and Iraq to finance the huge upfront costs that new oil fields demand. I think that Russia is already cutting back on Siberian exploration just as the US shale producers have.
While many view the current drop in crude prices as too far, too fast this may have been the better option to have this fall now when it can be controlled instead of in 4-5 yrs when massive over-production really hammers the market after even more junk bonds and various financial shenanigans have been expended in the chase for more oil, truly destabilizing the global financial system.
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Indeed, we've known the Saudis were trying to go after US shale producer market share, but what if they are also gunning for Russia's and even other OPEC members?
I think it's interesting how, in the last 3 weeks, we've had the energy minister from the UAE, the CEO of the Kuwaiti national oil company, and Saudi oil minister come out, one at a time, and proclaim that OPEC would stand firm at a lower, and lower price.
Kuwait oil company CEO: "$65 oil through June 5"
Then UAE Energy Minister "No production cuts even if oil at $40, not for at least a quarter"
Now Saudi Oil Minister "We won't cut production at $60, $40, or even $20. We may raise production to increase revenue"
Perhaps they are trying to drive the price down on purpose as a weapon against their economic and political rivals.
Note who made the statements, high ranking officials of UAE, Kuwait, and SA, three of the nations with the largest foreign currency reserves who can hold out the longest (Kuwait could with stand 3 years at $20 oil before its coffers ran dry).
Meanwhile Venezuela had about 5 months of reserves at current prices before China bailed them out. Iran has 21 months left.
Oil analysts are talking about the price of crude bouncing back in 2015 because, on a purely economic basis, it has too.
But if you factor in that maybe SA has decided to permanently neuter its enemies on the world stage, then they might be willing to push this thing out for 2 or even 3 years.
Imagine if OPEC holds production on June 5 and oil crashes to $40.
Russia, Iran, and Venezuela are doomed. Half of US shale producers go bankrupt.
SA then announces its increasing production (they hold 5 million barrels/day of capacity in reserves) to make up for lower revenues.
Oil crashes to $30. Russia and Iran cut off Assad who collapses.
Saudis increase production even more.
Oil collapses to $20, ISIS is caput, and all US shale oil producers are out of business.
SA then can cut production back from 15 million barrels/day to 10 and the price of oil would soon increase 400% to $100 and they now hold perhaps double the market share and all their enemies are politically, militarily, and economically, dead.
Report this CommentOn December 28, 2014, at 5:03 PM, Foolistherule wrote: