Sunday, October 19, 2014

Saudi Arabia Commences Oil Price War - Saudi's Fund Sunni Fundamentalism - ISIL Oil Reaches Market Through Turkey and Israel - America Manipulating Saudia Arabia to Inflict Economic Damage on Russia - Predator Pricing Move - Production Collapse?

Source: PINETREE Capital Ltd.

Oil Wars?

Marshall Auerback
October 14, 2014

The Saudis continue to pump out large quantities of crude and the price is hitting multi-year lows. A lot of existing oil producers are upset with the Saudi actions, notably the Russians, who have suggested that the surplus of oil on the world market is a temporary phenomenon, according to the Vice President of Russian oil giant Rosneft Mikhail Leontyev.

"The current price dynamic, which has been developing for the last few months, may not reflect the objective trend," Leontyev told the Russkaya Sluzhba Novostei radio.

"Prices can be manipulative. First of all, Saudi Arabia has begun making big discounts on oil. This is political manipulation, and Saudi Arabia is being manipulated, which could end badly. The second factor is the stolen ISIL [Islamic State] oil, which reaches the market through Turkey and Israel with a triple discount. It is not much, but it is stolen, so it is cheap," the Rosneft vice president said.

And Venezuela is unhappy as well. Venezuelan foreign minister Rafael Ramirez recently called for an emergency Opec meeting to take measures to halt a slide in world oil prices.

Opec "must coordinate some type of action to halt the falling price of oil," said Ramirez, who had long served as Venezuela's oil minister until his recent shift to the foreign ministry.

Venezuela's government "is convinced that (falling oil prices) are not due to market situations but to price manipulation to create economic problems for the large oil-producing companies," he said.

"It's not good for anyone that the oil price should fall below $100/bl," Ramirez said.

If one looks at the state of play in the both the Middle East and Russia, the Saudi actions become more understandable. The Fed has attempted to assure the world that things are "normalising" here in the "Goldilocks economy" that its biggest focus is when it will raise interest rates to keep the economy from overheating and keep inflation in check. That thesis has been quite a bit of a stretch with 45.3 million of its fellow citizens living in poverty and a labor force participation rate of 62.7 percent – a data point that has been steadily getting worse since the financial crisis in 2008, but it’s the line consistently being spouted by Janet Yellen since she took control of the Fed.

A key component that has allowed both the Fed and Congress to keep from taking strong measures to address a looming deflation has been the price of crude oil. Because oil impacts everything from transportation costs that inflate the price of food and other products to the cost of an airline ticket or heating a home, the high price of this commodity has, to a degree, masked the growing deflation threat.

As Ed Harrison has noted in his excellent “Credit Writedowns”:

"Inflation expectations embedded in the TIPS market have been collapsing since early August. According to Reuters, following the Fed's most recent meeting and an unexpected monthly drop in the US CPI in mid-September, downward momentum in breakevens has been 'at its most intense since the financial crisis'. 10-year breakevens are now below 2%."

But it does make sense for the Saudis to comply with the American desires on a number of levels: you punish Russia (which has basically won in Ukraine, in effect succeeding in dismembering the country and neutralising the impact of Ukraine's move to the West), you create a quasi-tax cut for the overstressed American consumer, and you hurt Iran as well, which of course represents the front line of the Shiite vs Sunni conflict.

The danger of course, as Scott pointed out, is that you go too far and start neutralising the fracking boom because prices get too low. Of course, that also suits Saudi interests as an energy independent US makes life a bit tougher for the Saudis and engenders all sorts of uncomfortable questions like, "Why are we backing the same guys who fund this Sunni fundamentalism, which is now finding new expression in ISIL?"

Of course, it is ironic how everybody's touting our shale/fracking industries as the foundation of the US economic recovery, and yet the Saudis (and Kuwait) amongst others producing to drive prices lower than our marginal costs of production is somehow overlooked as a potential negative. Having our cake and eating it too! To say nothing about what it says of the power of the central banks that after balance sheet expansions worldwide that have never been dreamed of before, we're still sitting on the cusp of global deflation.

Oil Wars (Part II)

Marshall Auerback
October 16, 2014 

In hindsight, it does appear that the downward drift in oil prices over the last few months signaled an intensification of deflationary pressures, which was partly masked by bubbling stock markets. It has been suggested that the break in the markets now gives the Fed the cover to resume QE or, at the very least, reconsider its move to raise rates on the increasingly weak grounds of "inflationary" pressures.

Perhaps this is true. But there is another dynamic at work here: this deflationary downdraft also gives the Saudis room to carry out a more aggressive move to reassert their control of the crude markets.

But wait? Didn’t Saudi billionaire Prince Alwaleed bin Talal recently state that the world's top oil exporter should start worrying about the recent slide in global oil prices and warned against the negative effect of such a drop on the state revenue? Well, as a major investor in the stock market, he wouldn't be happy about the performance of the market recently, so (to paraphrase Mandy Rice Davies), he would say that, wouldn’t he?

But the prince might not speak for the Saudi government. They want to crush shale as a competitor to oil before people retool to use more natural gas for heating and other stuff.

And they hurt all the tar sands people and a lot of alternative energy plays. And they hurt all the other less rich petrostates, almost all of whom are their enemies or they don't care if they hurt them (Venezuela, Mexico).

This is a classic predator pricing move. They may have decided to accelerate the repricing to do more damage. And they can now do so under the guise of global deflationary pressures, over which they have no control (or, at the very least, justify the move as a kind of stimulus to help support the overburdened consumer).

With eminent predictability, the International Energy Association (IEA) has come out immediately today to defend shale, saying most of its profitable under $80, which is questionable, because they haven't shown it to be profitable at $100. For many years now, oil, not "Dr. Copper", has been the definitive measure of the global economy, and that this supply glut has appeared in the last two months says one thing, the global economy is in much worse shape than thought.

But it makes sense: remember Europe which is around 20% of oil demand, never came back from 08, with numbers all in double digit decline, from Germany to 12% to Greece over a third. The only place that really has risen is US but its still a million or so down from 07 height. China has been biggest growth in last decade and half, and they've been stagnant this year, and latest month (never totally reliable) says its actually down, plus rest Brazil etc, the economy is stagnant, and the fact is it really cannot produce its own oil profitability at less than $100.

All one has to do is take a look at the performance recently of the shale plays, which have been hammered recently. Last Monday, Goodrich Petroleum, a small oil and gas producer, fell by 30 per cent, making it the day's most spectacular casualty, but much larger companies were hit too, with Continental Resources off 5.1 per cent, Hess off 5.8 per cent and EOG Resources off 6.8 per cent.

Saudi Arabia's apparent willingness to let crude prices fall to damage its competitors will test the capital markets' support for US producers. It is shaping up to be the North American industry’s toughest examination since the shale revolution started to revive US oil production in 2009.

Bob McNally, a former White House official and now head of Rapidan Group, a Washington-based consultancy, argues that rather than reining in production to support oil prices at about $100 per barrel, Saudi Arabia can easily afford to let them drop to at least $80.

A rough calculation indicates Saudi Arabia would only forego a fraction – between $10bn and $20bn – of its nearly $750bn in foreign exchange reserves were it to let oil prices fall to $80 per barrel, he says.

"When it's needed the Saudis are not going to be the ones that cut production,” adds Mr McNally.

"Recent comments by Saudi officials imply that if anyone has to cut, it has to be the Americans."

There are some who argue that for budgetary purposes, the Saudis need oil above $90, but they are certainly not the ones which are most vulnerable if the price stays around these levels for a while.


October 19, 2014

Putin: Global Economy Will Collapse if Oil Prices Remain at $80 per Barrel

Oil pumps work at sunset in the desert oil fields of Sakhir, Bahrain, Tuesday, Oct. 14, 2014.


MILAN, October 17 (RIA Novosti) – Russian President Vladimir Putin said Friday that world economy will collapse if oil prices remain at $80 per barrel.

Shale oil production in the United States is profitable at a price of $80 per barrel, according to Putin.

"If oil prices remain at $80 per barrel, it will lead to production collapse. Budgets of all major oil-producing countries are based on the price of little more than $80, close to $90 per barrel…" the Russia leader told reporters after the Asia-Europe Meeting (ASEM) summit in Milan.

Crude oil prices have been in decline since mid-June and have lost over 28 percent of their value since that time. Oil prices started dropping on October 10 after OPEC published its October report which indicates increases in oil production in OPEC-member countries. Gulf nations plan to oppose any cut to OPEC's oil-production ceiling at next month's meeting, according to experts.

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