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Kurt Cobb

Kurt Cobb

Kurt Cobb is a freelance writer and author of the peak oil-themed thriller Prelude. He speaks and writes frequently on energy and the environment and…

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Do Saudi Arabia And Russia Really Want Higher Oil Prices?

Russia and Saudi Arabia

The jawboning of oil prices by the Saudi Arabian/Russian tag team should be wearing off after more than a year of actions that don't measure up to the words. Oil prices slumped recently, dropping from around $54 per barrel to just below $50 as of Friday's close.

As if on cue, the Russian energy minister announced Friday that Russia has now met its target of reducing oil production by 300,000 barrels per day. It took four months to do something that should have taken just weeks. (The agreement came into force on January 1.) And, of course, we'll have to see if the Russians have actually done what they say they've done.

Only a week earlier, the Saudi energy minister indicated that there is momentum growing in OPEC for extending production cuts beyond June for another six months. This announcement comes only six weeks after the same minister said that OPEC would NOT be considering extending the cuts. This is reminiscent of last year's run-up to the production agreement in which Russia and Saudi Arabia kept alternating in making often contradictory announcements to sow confusion about the possibility of a production agreement and keep markets on edge without actually having to do anything.

I continue to question the sincerity of Saudi Arabia and Russia who I believe remain committed to undermining the production of tight oil (shale oil) in the United States. Despite the cuts agreed to for this year through June, the March numbers suggest substantial non-compliance among non-OPEC signers of the production agreement and a reminder that major producers Libya, Nigeria and Iran have been exempted from cuts. Do Saudi Arabia and Russia really want prices to rise enough to make tight oil profitable all across the United States (and not just sweet spots in the Permian Basin)? I'm not convinced. Related: Saudis To Boost Oil Export Capacity To 15 Million Bpd In 2018

The Saudis and the Russians want to appear as though they are "doing something" about low oil prices. But they and their fellow producers simply aren't doing enough to push prices higher. And, that may actually suit the Saudis and the Russians just fine.

Meanwhile, U.S. tight oil producers keep touting ever lower "breakeven" prices for their relatively expensive oil. But, as petroleum consultant Art Berman has been pointing out for some time, the lower breakeven prices are almost completely the product of crashing oil service costs rather than technological miracles. And they aren't limited to tight oil producers, but rather reflect conditions across the entire industry.

The oil service companies and equipment fabricators are faced with depression conditions and have slashed prices to keep some revenue coming in and maintain market share until the next upturn. Pricing for services and oilfield goods is dynamic not static. When conditions improve, costs will rise accordingly and so will breakevens. Related: Saudis Further Discount Crude To Asia

One thing all this talk has done is fan speculative interest in the oil futures market where open interest has soared even as prices have traced out a mostly sideways pattern. Clearly, many speculators believe the hype about sharply higher oil prices. I believe they are going to wait quite a while longer--at least until Saudi Arabia and Russia are satisfied that the investment capital flowing to tight oil drillers in the United States has been largely shut down.

At some point, low investment worldwide in oil exploration and development will start to make a significant dent in world supplies. Remember: depletion never sleeps. But the world economy may be softening; in its most recent Oil Market Report, the International Energy Agency revised oil demand growth downward in response to slower worldwide economic growth. That suggests that the expected uptick in oil demand growth may not materialize for some time, keeping investment generally low.

The longer investment remains low, the bigger the oil price spike will be when it does arrive in response to shrinking production capacity, rising demand or both. The oil bulls will eventually be right. But will they hang on long enough to enjoy their vindication?

By Kurt Cobb via Resource Insights

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  • Bud on May 02 2017 said:
    The Saudis and Russians are trying to spoil rio's or capital investment in competitive oil. The major ioc's have been publicly targeting 55 dollar oil and the Prince bracketed 45-55 just today, spurring hot money to short futures. The fact that the curve is flat out five years is music as it prevents any locking in of excess returns. Spoil baby spoil, that is what that wry smile is all about.
  • Bob on May 03 2017 said:
    Saudi Aramco has become a 100-percent owner of Port Arthur, an oil refinery in Texas. Port Arthur has a capacity of 600,000 barrels per day, making it the biggest in North America....Saudis also acquired 24 distribution terminals, Aramco said in a statement. The Saudi firm also got the exclusive right to sell Shell-branded gasoline and diesel in Georgia, North Carolina, South Carolina, Virginia, Maryland, Washington DC, the eastern half of Texas, and the majority of Florida.(RT 5.2.17)
  • TM on May 03 2017 said:
    What Saudi Arabia and Russia want is clear: High oil prices forever and no competition. But shale oil's pandora's box has been opened (initially in the US but now also in Argentina, and other countries will follow) and that will never be possible again. So now they are trying to keep prices on a level that allows them to survive while at the same avoiding shale oil resurgence . Either way, Saudi Arabia is clearly doomed in the mid to long-term. Anyone who knows these guys and has worked with them knows they are still in the middle ages, and they completely lack a work ethic to survive beyond oil, no matter how much money they invest here and there. Regarding Russia, they will suffer but they will be able to adapt somehow. Beyond their economic problems, at least they have a good technological and scientific level, and they are able to work hard when they have to. So if you ask me what that wry smile means, i would tell you it means nothing, except a lack of understanding about the storm that is coming.
  • Jonathan on May 03 2017 said:
    You cant trust either of them , their words have no merit.

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