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Leonard Brecken

Leonard Brecken

Leonard is a former portfolio manager and principal at Brecken Capital LLC, a hedge fund focused on domestic equities. You can reach Leonard on Twitter.

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Saudi Policy Tied to Weak Economy

In recent weeks I have read many oil prognosticators theorizing what the ultimate Saudi strategy is, or what their end game might be.

To recap, in mid-2014, Saudi Arabia decided to pump more oil into the market that was already starting seeing rising supply. U.S. shale was largely blamed for the so called supply “glut,” but in reality it is the Saudis/OPEC that are actually over supplying the U.S. market as imports are currently soaring. Imports are up 10 percent compared to last year even when domestic supplies are plentiful.

There are two realities: one portrayed by the media/headline data and the other is the reality born out of the underlying indicators. The headlines generally say one thing and the underlying data says another. I have previously said that this data distortion is in part tied to central bank policies, which are distorting one asset class (equities) while the commodity sector reacts in a very different manner. Related: Crude Crushed As Production Freeze Hopes Thaw

Back in late 2014 after QE3 it was becoming clearer that the U.S. economy was losing steam, a problem that continued into 2015 (I wrote about this recently here). So is it possible that the Saudis realized the same thing: that the global economy was awash in debt and was on unsustainable path following an unprecedented monetary expansion, and thus was in need of stimulus through lower energy prices?

The economics of Saudi Arabia’s move simply don’t make sense on paper…..halving prices when you boost output by 10-15 percent does not compute. But with the recent chatter about an IPO of Saudi Aramco and diversifying away from oil, at the same time that electric vehicles start to come of age (at least in the minds of media), lower oil prices to spur demand makes perfect sense. If this theory is true then the “lower for much longer” theory on prices has very deep implications for price recovery despite oil price fundamentals. Related: Forget The Tough Talk – Saudi Arabia Is Desperate For A Production Freeze

The possibility that the commodity sector is being used as some sort of QE is a very plausible theory that I have laid out in the past. But the reality is that there are very mixed signals coming out of the world economy and desperation from Japan and EU with recent monetary moves are obvious examples. The real recovery in oil prices will come from macro forces not from change in oil fundamentals. After all, that’s not what got us here in the first place as the U.S. dollar in large part triggered the collapse. Oil fundamentals were secondary. Monetary and political forces on asset prices have never been greater. Until governments realize that only through lower taxation and regulation can we spur growth, a true recovery will not arrive.

On a personal note, I wanted to thank OilPrice.com and its readers for the opportunity to convey my opinions. I hope that my published work spurred some real intellectual thought on views not discussed in the mainstream media. This may be my last article for some time as I begin a different career within financial services. You can always reach me on Twitter @lbrecken13 or LinkedIn.

By Leonard Brecken for Oilprice.com

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  • Gray Mewburn on April 02 2016 said:
    it saddens me you push American propaganda
    The oil glut is LTO - Light Tight Oil
    Shale oil produced by America and clogging your inventories
    US refineries can use 2 MBD
    Tracker are producing 4 MBD - the overproduction goes to your inventories
    OPEC and the Saudis have nothing to do with it
    have the balls to take responsibility for your own mess
    Gray
    OIL WATCH Group at G+
    also PEAK OIL happened at G+

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