There is an eternal truth in the global oil markets: if the current price of oil does not free the market, it will fall. The reversal also applies: if the supply does not meet demand, the price rises. Similarly, the perception of each state by the market, rather the actual data, can also affect prices.
This means that we can use instructions from the understanding of past events that have affected the oil, and apply them to this day. Timing is crucial because no one can really say exactly when the market will respond, in one way or another, to the larger forces that influence it. If you launch a rocket at the moon, do not aim at where it is now, calculate the trajectory and aim where you think it will be. The calculation of what will happen to oil and gas prices is conceptually very similar, although the analysis contains many more moving parts that make the topic of timing relevant.
Recently, the final game for the OPEC meeting became clearer. Here is a brief discussion:
Russia and KSA
This image of a burgeoning "bromance" between Russian President Vladimir Putin and the Saudi Crown Prince Mohammed bin Salman should dispel any doubt about the Russian dictator's intentions towards the Middle East.
Source Putin "high five" the Saudi Crown Prince in Buenos Aires.
You read in a recent article where I thought about its probabilities The answer might be to face the decision to keep your existing captive market in Europe at low prices or shut your ears to the Saudis sweet. Here is an important quote from this article if you have somehow missed it.
"Russia is harder to predict due to the influence of the political elements, but in any case I believe that political goals will win the day. Putin wants to mitigate US influence in the MEA region and could use the price of oil to achieve that goal, even at the expense of some European sales. The Russians also have competing goals to maintain their traditional European markets and join the Saudis. Attempting to achieve this balance is likely to lead to support for the price of oil.
Events have overwhelmed and ratified the latter view, filling a vacuum in current relations between the US and Saudi Arabia, as evidenced by the portrayal of the two men in Argentina. The current grind of American political teeth over the low level of indiscretion of MbS in Turkey provides an ideal opportunity for the old Russian haunting. One side of what I want to bet is Lesson # 1 of the KGB Operations Manual: "Do not waste a crisis". Putin only ensures that MbS knows that if the Americans continue to pollute him, he has a friend Russia. As in America, there is no disadvantage for Putin in this transaction. After it is known that all the enemies of Putin were occasionally … taken off the board, so to speak. These guys have more in common than you can see at first glance. Related: Oil cuts may come but do not insist
That is, I think there's no secret in the OPEC meeting next week. Not that they will skip it. Which reasonable person would miss a party in this legendary city? The party continues as planned and an announcement of production cuts is coming up. Saudi Arabia and Russia are once again forming a swing block.
A trip back to 2015-16
Thanks to the decision of KSA from 2014, 180 degrees to year of the tradition of defense of oil prices and instead go for market share. Over the next year and a half, they filled every canoe and teapot on earth … and the price fell … and crashed. WTI reached a low of $ 26 in February 2016 and a change.
The Saudis were now earning so little from their main source of income that imperial economic initiatives were under threat. At the end of 2016, a meeting was called, with around one million barrels taken off the market each day. And something happened that had not happened since 2001. The Russians joined in.
After that, it took a while, but in mid-2017, oil began to rise in price. This remained largely unabated until October this year. The reasons for the sharp decline were discussed here and elsewhere. Abandoning the Iranian oil sanctions (as brief as they are intended) have eliminated the sanctions of the teeth, so that the oil can fall into its current decline.
So wrap that section. The warmth of greeting between MbS and his best buddy in the world is more than symbolic. After buying the American insistence that they need to increase production in light of the upcoming severe sanctions on Iran just to get rid of the carpet and the oil price among them, the Saudis may be denied the search for a new group of Friends.
One of the things that worries me about the nationalist point of view that our current president so often expresses is that we are not living in a vacuum. We need friends in the world (as dark as they are) who believe they can count on us to take their interests into account.
It is known that the Saudis need the price for Brent in the middle of 80 dollars to balance their books. We are currently far from it. This is a fact that is apparently not recognized by the administration. We live in a networked world. This little trick we played with the Saudis will follow us in a way we can not really predict at this point. Related: Will Canadian Oil Producers Cut Production?
For the record, I think the American trade policy directed at China is right. I hope we keep the course we have chosen. Russia is a bad actor and has committed numerous misdeeds in recent years. Whether they will ever be held accountable remains to be seen. However, in terms of impact on the US, they have faded compared to China's economic and military threats.
To sum up, one can say with certainty that the trust between the US and Saudi Arabia exists has been trampled by the waivers against Iran rather trampled. I know how I would feel in her position. If I were MbS, I could be Vladimir Putin on the world stage as "high-fiving" to show my American "friends" that maybe it's "time to see other people."
On the world stage as in personal interactions. That's never a good point in a relationship.
Where do we go from here?
I do not seriously assume that the American-Saudi relationship is irreparably damaged. With regard to the stability of the Middle East, we have too much in common to achieve this. I think that cooler voices will prevail over sanctioning the KSA over the killing of Khashoggi. But the relationship will probably be different, maybe a little tighter. We opened the door to the big Russian bear, and we have to deal with the consequences of our actions.
In the short term, assuming I am right, and we will see a substantial production cut next week. We will have to wait until the world absorbs some of the surplus oil in floating camps. We had 10 weeks of uninterrupted shell work, which must be completed. We also do not know yet how quickly the cuts will be implemented.
We'll also have to see how long it takes for the slate frackers to change their behavior given the $ 50 oil price. So far, we have not seen any signs, and some rigs were added every week. At some point, the Fracker will wake up and find that oil at $ 50 does not go as far as oil at $ 75 and hits the brakes just a hair long. In some northern regions of the US, a seasonal break is due as winter drilling becomes difficult.
In practice, we are likely to be well into the first quarter before impacting OPEC production cutbacks. However, if we do, it will be back in June 2017 and the price of oil could react strongly to the uptrend.
By David Messler for Oilprice.com
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