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Saudi Arabia Won’t Let Oil Head Back To $20s Again

Saudi Arabia Won’t Let Oil Head Back To $20s Again thumbnail

Saudi Arabia and American frackers are gearing up for the second oil war.

It will take oil lower, but not back to $20 again.

Saudi Arabia has kept its promise. It has cut oil output by 486,000 barrels a day, in line with the OPEC agreement the Kingdom pulled together last October, helping oil stabilize above $50 per barrel.

And it has set up an example for the rest of OPEC and Russia, who have kept their own promise to stick with the October accord, officially at least.

For a while things in the oil market seemed like back in the old good days: oil prices headed north, approaching the magic number of $60, and the Saudi Kingdom was talking up its grand plan, the Aramco IPO.

But in the last three days the oil market has gotten oversupplied, and oil prices are heading south again, dropping below the other magic number, $50.

Apparently, American frackers—the new swing producers—did it again. They have flooded the market with oil to fill in the shortfall generated by OPEC and Russia, as evidenced by the rise in oilrigs—up 288 from last year to 768, and the growing US oil inventories.

  Financial Product 3-day performance 5-year Performance
iPath S&P GSCI Crude Oil (OIL) -11.03 -80.36%
United States Oil Fund (USO) -9.15 74.69%
Market Vector Oil Services (OIH) -4.50 30.83%

Source: 3-10-2017

That’s why American frackers and Saudi Arabia are headed for a second oil war that will take the price of oil lower – but as mentioned previously, not back to the $20s. Saudi Arabia won’t let it happen.

For a number of reasons. First, the Kingdom has learned a lesson the hard way: it cannot end the American fracking revolution by engaging in a price war with the frackers — who have demonstrated an exceptional ability to survive even at extremely low prices.

Second, Riyadh’s leaders do not want to antagonize the new Washington administration by declaring another war on American frackers.

Third, there’s Riyadh’s grand plan: the Aramco IPO — float shares of state-owned company Aramco to the public to pay for its vision 2030, which will make the Saudi economy less dependent on oil.

The success of Aramco’s IPO, which promises to be the biggest in history, depends heavily on the situation in the oil and equity markets at the time of the “road show”– the date for marketing of the IPO. The higher the oil prices, the easier it will be to pitch Aramco to institutional investors at a high price.

Fourth, the Kingdom may be running out of oil faster than previously thought. Its major oil fields have become mature, and new fields are hard to come by, which adds to pressure to launch the Aramco IPO sooner rather than later.

That’s why Saudi Arabia will pursue a radically different strategy this time around: continue to cut oil output to forestall price declines, even if that means giving a “free ride” to American frackers.


10 Comments on "Saudi Arabia Won’t Let Oil Head Back To $20s Again"

  1. Cloggie on Sun, 12th Mar 2017 1:41 pm 

    Cheap oil means cheap steel. Forget about buying gold, buy massive amounts of steel instead with which you can build wind towers:
    (click 10 years)

    High was $1265/ton in 2008 shortly before the Lehman crash.

    All-time low last year $90/ton.

    Now the price is $312/ton.

    With the wind boom now underway, investment in steel is a good advice.

  2. BobInget on Sun, 12th Mar 2017 1:42 pm 

    With six million Africans starving:
    South Sudan, Somalia, N. Nigeria, will the West simply let these people die? Google anyone of these and let us know if genocide fits OUR predicament.

    One solution, now being considered by our great Allies
    Saudi Arabia, obviously genocide. If that sounds a bit
    over-the-top, take a look at Yemen…
    Saudis will not permit relief vessels into ports.

    ALL of the above are or were oil exporting nations.

    Venezuela ran out of passports for oil workers and residents. Production, such as it was, ALL promised to China and Russia to pay over-due debt.

    Saudi Arabia is planning a stock offer for a small portion (261 Billion B) of Aramco for which KSA hopes to raise almost a trillion dollars.

  3. rockman on Sun, 12th Mar 2017 4:26 pm 

    “Saudi Arabia has kept its promise…helping oil stabilize above $50 per barrel.” BS: Brent stabilized above $50/bbl 1 Dec 2016. And from 23 Feb to 10 March it fell from $57/bbl to %51/bbl. IOW there appears to be little correlation between what the KSA CLAIMS to have done and the price oil movements.

    “Apparently…have flooded the market with oil…as evidenced by the rise in oilrigs…” It takes 3 to 6 months from the day a rig move on to a well for it to begin producing. Which is supported by the fact that from the lowest rate of 2016 (8.578 mm bopd) to the lattest rate from the EIA (Dec 2016: 8.783). IOW US production increased 152,000 bopd. Which represents a 0.16%increase in global oil production.

    Thus what SIGNIFICANT effect the increased rig count will have on US oil production remains to be seen. And since it has yet to materialize it has not affected oil prices. And if one wants to try to make that link they need to explain why oil prices fell almost 10% frm the previous stable period of a bit more then 3 months.

  4. Sissyfuss on Sun, 12th Mar 2017 5:12 pm 

    we are the world, we are the children.
    Deja vu all over again but louder.

  5. Midnight Oil on Sun, 12th Mar 2017 8:37 pm 

    What does Janet Yellen say?

  6. Boat on Sun, 12th Mar 2017 10:41 pm 


    If you go look at y-charts they show a low July 1st of 8.428 and as of March 3rd production of 9.088. I would call tha a significant effect from the increased rig count. I would also call it a trend.

  7. GregT on Sun, 12th Mar 2017 11:56 pm 

    “What does Janet Yellen say?”

    Janet says whatever she is told to say.

  8. GregT on Mon, 13th Mar 2017 12:01 am 


    Do you ever pay attention to Rockman’s replies? If you do read them, then why do you continue to make yourself look like an idiot?

    Just asking…….

  9. Midnight Oil on Mon, 13th Mar 2017 12:16 am 

    Which is? Whatever it takes…that means anything…to keep the “juice” flowing and
    the appearance of economic “growth” in the forefront of Ozzie and Harriett.
    The Royal family of SA…please…just a front for Uncle Sam…the Godfather.

  10. Joseph Hale on Mon, 13th Mar 2017 5:18 am 

    It amazes me that American’s can lower the would price of crude oil by producing high cost oil. The US portion of the OPEC cuts is only about 300,000 barrels per day, which can easily be made up by increased drilling of LTO. Is the rest of the world dealing with the output cuts so easily?

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