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Oil Price Crash Was Not Saudi Arabia’s Fault

Oil Price Crash Was Not Saudi Arabia’s Fault

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.

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

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  • Jay on March 10 2016 said:
    It was and continue u rd to be Saudis fault. They added rigs at record levels and produced as much oil as they could. That caused the crash.
  • Sadah on March 10 2016 said:
    Finally an article that isn't afraid to speak the truth. Thank you.
  • Dean on March 10 2016 said:
    There you go again with the propaganda. The U.S. shale production threatens no one. We don't even produce HALF 50% of the U.S. daily demand. If the U.S. produced the 19 MM BOPD that we require , then we would be close to a threat. I just can't tolerate irrational thinking & propaganda. Wake up people
  • Peter M on March 10 2016 said:
    Western media is hell bent in portraying the saudi's as the evil destroyers of shale production. Its quite entertaining to see people who work in North american oil patch blame arabs. 'Opec wants to destroy us' is quite simply a dumb statement given the fundamentals. I don't understand if its pure ignorance, stubbornness or simple blind bias towards the middle eastern governments that causes these statements to be made.
    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.
  • Mike on March 11 2016 said:
    Saudi Arabia and OPEC as villains for low oil prices? US production of oil are heroes! There is definitely a price war going on, OPEC along with Saudi Arabia could freeze or cut production even a mere rumor affects oil prices.

    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.
  • Muhammad Muhammad Muhammad on March 11 2016 said:
    It's not Saudi's fault. They've manipulated oil prices for decades outside of natural supply and demand then flooded the market. So the US caused the glut by responding to the free market. Global Jihad.
  • James Hilden-Minton on March 11 2016 said:
    This is a very good persoective. The market seems to expect Saudi Arabia to defy basic market forces and resents them when they fail to prop up prices that lead to oversipply. This is an irrational and childish exprctation.

    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.
  • Dhewitt on March 11 2016 said:
    Let's be honest, OPEC has no idea how to manage a calculator let alone be honest. This article is like defending the kid with his hand in the cookie jar and crumbs on his lips. Not only can't SA and OPEN tell the truth, calculate long term losses but you know when they are lying because their lips are moving. There is no commitment to staying within their actual quotas, so they just over produce and act like victims. Who says SA should have a right to produce 12 million bbls a day, yet they represent only a fraction of the world population. They are causing havoc in the banking and equity sectors because they want to. If OPEC would cut their production 10%, they would have a solid 90 per bbl and they would save 10% of their reserves. Yet, their plan is to lie about their motives, over produce and then blame it on everyone else. The United states is 10 times the population and we don't even produce enough oil to be independent. So why are we the logical blame for undisciplined reckless economic mayhem upon the world? I suppose because we have a President that will agree with anything these nuts in the middle east say and especially if it destroys free economy and balanced trade.

    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.
  • Truth on March 11 2016 said:
    Not Saudi Arabia or OPEC's fault; they maintained constant production while the US increased 75% over 5 years; shale and unconventional drilling methods made reserves that were previously uneconomic economic, and every producer scrambled to extract as many barrels as possible in an environment where a barrel of oil could fetch a $100 price. In turn, supplies exceeded demand and the market crashed. Not rocket science, but some uneducated conspiracy theorists will argue otherwise.
  • thecrud on March 12 2016 said:
    No Saudi is responsible for the high price in the first place by organizing OPEC for the purpose of sandbagging production, This was the market manipulation. At a minimum they should have all been iced from UN and no favored nation status etc.
  • Meh on March 12 2016 said:
    So Saudi Arabia admitting it has increased output to lower oil prices is a lie? Ali Al Naimi repeatedly telling Shale producers to get out the market is also lies?

    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.
  • Microecon on March 12 2016 said:
    Virtually all the previous comments have considered only the supply side. Another reason for the price drop is the anemic demand. European taxes and regulation, the American recession and stagnation of the last eight years, the sudden braking of Chinese economic growth have all played a part.
  • Faceit on March 14 2016 said:
    The comment by "Truth" is correct: "Not Saudi Arabia or OPEC's fault; they maintained constant production while the US increased 75% over 5 years." It's contrary to common sense to blame Saudi Arabia for keeping their production constant, and not blame US shale oil producers for borrowing tons of money (which they'll never be able to pay back) to do unprofitable fracking which dumped billions of barrels of surplus oil on the market in a Ponzi scheme. Yes, fracking is a Ponzi scheme, because the fracking companies were losing money even at $100 a barrel, yet they convinced lenders to continue loaning them money when oil went down to $30 a barrel. Now the new loans are being used merely to pay back interest on the old loans, until eventually the companies go bankrupt and walk way leaving banks and investors holding the bag! Fracking company CEOs were paid bonuses based on PRODUCTION numbers, not on profits, so the more money the company lost (through producing oil at a loss), the higher the CEO bonuses! Eventually, like all Ponzi schemes, fracking will come to an end, companies will declare bankruptcy, CEOs will walk away with golden parachutes, banks will go under from the bad loans, and as usual the government will bail out the "too big to fail" banks, leaving taxpayers with the bill for this Ponzi scheme. It's a lot like the subprime mortgage Ponzi scheme!
  • dhewit on March 15 2016 said:
    Since when is the US responsible for producing oil that doesn't even meet our own supply demands become a world wide problem? Maybe the guys with towels on their heads should trim it back a bit and get a real job instead of over-supplying the world with oil far in excess of their respective population. Maybe they should start building universities in place of smurfdoms with Princes of sand kingdoms. This is all a bit ridiculous.
  • Thomas E Stanley on March 15 2016 said:
    The Saudi's and their alter ego OPEC could have stopped the oil debacle anytime just by reducing their output. Did they? Did they even try? Face it it's their fault entirely, all the way up to their draining their oil fields and causing extreme friction across the rest of the OPECKERS.

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