Quite simply, the Saudis want to maintain their market share, but their means to control that are dwindling.
The whole internet is jam-packed with analysis portraying Saudi Arabia and OPEC as villains for the oil price collapse. On a closer look, however, the Saudi’s could have taken no reasonable steps to avert this situation. This is a transformational change that will run its full course, and the major oil producing nations will have to accept and learn to live with lower oil prices for the next few years.
Why the Saudi’s are not to blame
(Click to enlarge)
As seen in the chart above, barring the period during the last supply glut, the Saudi’s have more or less maintained constant oil production, increasing production only modestly at an average of roughly 1 percent per year.
Related: Exposing The Oil Glut: Where Are The 550 Million Missing Barrels?!
The last time the Saudi’s reduced production, the only objectives they achieved were higher debt and lower market share. It’s no surprise that this time, they were unenthusiastic about following that same path. Had they resorted to any cuts, it would have ended with them losing market share and revenues—nothing more.
U.S. oil production has almost doubled in the last 10 years
The most significant event of the last decade regarding crude oil has been the rise of U.S. shale oil as a credible and long-lasting competitor to the OPEC. The shale oil boom has led to an almost doubling of production in the U.S. in the last 10 years. Booming oil prices, easy credit, consistently rising demand and improved technological methods of fracking led to the current production rate, which would have increased further had OPEC cut their production. Related: Oil Fundamentals Could Cause Oil Prices To Fall, Fast.
When it comes to oil, Saudi Arabia has enjoyed an unopposed leadership position for a long time. When that position was threatened by the U.S. shale oil, it was natural for them to attempt to protect their market share. However, like every other industry, leaders tend to be lax, ignoring competition until it’s too late. The same happened here too—most oil producing nations failed to take corrective measures, and they are facing its consequences now.
Where are we heading
If oil prices were to drop to the lower $20s/barrel, the Saudis, Russia and OPEC wouldn’t survive for long. Shale oil would take a hit as well, but would be back in production whenever prices rise again; hence, prices will remain fairly volatile with a mid-point of $50/barrel for the next few years, as forecast by many experts. Related: Why Saudi Arabia Has No Intention To End The Oil Glut
The current meeting between the OPEC and Russia, although a smart step, will not lead to a material shift in the demand-supply situation. At best, if a production cut is announced and everyone agrees and adheres to the agreement, it will be years before inventories return to normal and the supply glut dissipates. As most of the oil producing nations require high oil prices to fund their budgets, they will resort to increasing production above their designated quota once oil prices rise above a certain level, which will once again bring the prices down.
ADVERTISEMENT
Along with that, the shale oil drillers have said that they will increase their production if prices move north of $40/barrel. The Kingdom of Saudi Arabia will have to look at other avenues to generate income to fund its budget deficits and accept the fact that U.S. shale oil is here to stay. U.S. shale oil has transformed the crude oil industry for years to come.
By Rakesh Upadhyay for Oilprice.com
More Top Reads From Oilprice.com:
- An Energy Pair Trade To Take Advantage Of Current Turmoil
- Is This The Next Offshore Sweet Spot For Big Oil?
- Oil Prices Sink As Investors Lose Faith In OPEC Freeze
US Shale production was in large part fueled by junk bonds and now the chickens have come to roost. I myself work in the NA oil industry but I am not deluded in blaming the Arabs or Russians.
Walstreet doesn't like oil prices this low, the United States government doesn't like oil prices this low because it lowers tax revenue, countries who made the mistake of narrowing their economy to oil do not like low oil prices, apparently some news outlets like this one is supposedly defending a non-existent problem. Consumers do not think Saudi Arabia are villains because of low oil prices, and that is the vast majority of the population.
Criticism should rightly go to high cost oil producers who failed to hedge longterm the value of the supplies they built. That is, the futures market really does tell us what future oil is worth. If supplier would consistently sell enough futures or forward contracts to at least cover foreseeable expenses and debt payments, this would do several things. 1) it would protect the oil producer against undue market risk. 2) Hedged incremental supply would drive down the future curve prices, signaling to all producers the sufficiency of future supplies. 3) This signal and the low value of futures for hedging would slow expansion of supply in an orderly way. Basically, if a producer does not like the low prices offered by the futures market, they have no rational business building out incremental supply. Conscientious use of the futures market can avoid and mitigate the risk of oversupply.
So I blame unhedged producers who rushed headlong into oversupply, childishly expecting bid daddy Saudi to defend high prices for the market. Oil is entering structural decline, and demand growth if any will not be robust. This means oversupply risks loom large. Hedging against oversupply should be the responsibility of all producers, and financiers should demand this.
Let's face it. SA is a smurf kingdom with papa smurf trying to keep his oil flowing to keep all the little pretend princes in power and happy with free junk. Seriously, why don't we just say the truth instead of being so politically correct all the time.
The oil crash was a deliberate Saudi ploy that backfired spectacularly, the gamble was drop prices to around $70 and the Shale producers would go out of business but shale resilience pushed prices lower and Saudi realized its own market share is at stake so they dropped prices lower hoping Russia would blink and give up share which Moscow has refused.