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Why OPEC Isn’t Going To Give Up On High Oil Prices That Easily

Consumption

With the most highly-anticipated OPEC meeting since November 2014 taking place Friday in Vienna, Macrovoices host Erik Townsend made this week’s podcast all about oil. He started his three-part interview series with Dr. Ellen Wald, the author of “Saudi Inc.”, a book about Aramco. During their discussion, Wald shares what she learned about the Kingdom of Saudi Arabia and – most importantly – how the royals view both Aramco and the oil market. This perspective is important, she explains, in interpreting why former Saudi energy minister Ali Al Naimi made the infamous decision back in November 2014 to keep OPEC oil production targets unchanged. That decision precipitated another leg lower in oil prices, eventually sending them to $30 a barrel. Many observers criticized the Saudis for shooting themselves in the foot by standing against production cuts. But the one thing that these critics didn’t understand, Wald said, is that the Kingdom has always treated Aramco like a family business.

They have two twin objectives: long-term profit and power. And when they look at Aramco, they’re not concerned about meeting, say, what their quarterly reports are going to show or their stock price. They’re looking at this in the long term, in a generational perspective.

And so in 2014 when it seemed as though oil production was increasing around the world – there was lots of other sources – not just shale oil production in the United States but we had really increasing from all over – they went into that OPEC meeting and everyone thought oh, they have to cut production. If they don’t they won’t maintain the price they need for the budget and this is what has to be.

Instead, they surprised everyone by basically walking out and saying to heck with it, we’re going to produce as much as we possibly can. And the reason, it seemed to me, was very clear: They knew that no matter how low the oil price went it was going to be that much worse for everybody else and not as bad for Saudi Arabia.

When Townsend asks about the decision to float 5% of Aramco in a foreign stock market (a plan that is reportedly on hold, for now at least), Wald explains that the Saudis respect their company’s “American heritage” (the Saudis slowly nationalized Aramco in stages during the 1970s and 1980s, buying it in stages) and they view the company as an international oil company like Exxon.

But in another sense, I see this as a natural progression for a company that was an NOC but has always seen itself as really a major international oil company. And it’s expanding its research, it’s expanding its downstream operations, in order to have a profile similar to that of an IOC. They are very, very proud of the patents that they’ve acquired and they compare it to the number of patents that, say, Exxon gets. It’s really very evident throughout this.

Next, Townsend turned to energy analysts Anas Alhajji and Joe McMonigle for a three-way discussion about what to expect From Friday’s meeting. Earlier this month, we heard from fellow “geological expert” Art Berman, who speculated that the current glut of oil created by the shale boom in the US is a temporary anomaly

But the bigger factor here is Venezuela and how quickly Venezuelan crude has come off the market. Venezuela was producing about 1.4 million barrels a day. It’s probably 1.3 now, in June. Under the OPEC agreement, they could be producing close to 2 million barrels a day. Berman speculated that the global demand curve is growing at a pace much more quickly than most market experts anticipate, and that – regardless of whether OPEC decides to raise or maintain production – the world will inevitably find itself mired in a supply crunch. But McMonigle asserted that the collapse of crude production in Venezuela has left a massive production hole that should be filled by OPEC members. Because of this, Saudi Arabia doesn’t have a problem with higher prices, and even OPEC itself is anticipating that demand will remain strong in the second half of the year.

So that’s 600-700 thousand barrels extra that has really accelerated crude stock drawdowns and I think has really supported higher prices quicker than most people thought. I was in the camp, and I think others were, that in the second half of this year we would be around between $70 and $75.

Obviously, we got there pretty quickly at $80. And most of that had to do with Venezuela. And then, of course, you had the Iran sanctions – which we’ve been talking about for a long time – that we expected to come. But there are a lot of people on the market that just didn’t think Trump would pull the trigger on it. Well, he did. And so that really pushed things up to over $80. There isn’t any crude yet coming off the market, but we certainly expect that there will be.

[…]

First of all, I have to say I don’t think OPEC is going to give up that easily on higher prices. I think the Saudis are quite comfortable with prices around $80. They don’t really see a production problem. The physical oil markets are pretty well-supplied, as I think Anas will talk about. But they really have a political problem instead of a production problem.

And the political problem is this: You know, higher prices, you’ve got some calls for action. Trump, of course, with his tweet a couple of weeks ago while the compliance committee was meeting in Riyadh I think really took them by surprise. I think there is kind of an implicit agreement to help because of the Iran sanctions. And that’s something that Saudi Arabia and UAE and all the other Gulf countries support.

However, the one thing that could change their minds, is a political issue concerning their relationship with the US. Following Trump’s aggressive Iran policy, there could be a consensus forming among the Gulf countries to support higher production levels that would held rein in prices. But this might not be in the long-term best interest of the Saudis.

Listen to the full interview below:

The podcast targeting pro finance and sophisticated investors, hosted by Hedge Fund Manager Erik Townsend

 

zerohedge



19 Comments on "Why OPEC Isn’t Going To Give Up On High Oil Prices That Easily"

  1. JuanP on Wed, 20th Jun 2018 9:36 pm 

    “Berman speculated that the global demand curve is growing at a pace much more quickly than most market experts anticipate, and that – regardless of whether OPEC decides to raise or maintain production – the world will inevitably find itself mired in a supply crunch.”

    I agree with Berman; we are headed to a supply crunch. That is why I think the OPEC+ Production cuts worked, and now increased production is needed to cool down the market. The deal was well thought out, but nobody foresaw that Venezuelan production would fall so much this year. The court decision accelerated the process Venezuela’s collapsing production should be replaced by producers with spare capacity available. The supply crunch is coming regardless, IMO, but it can be delayed and softened.

  2. Boat on Wed, 20th Jun 2018 9:47 pm 

    JaunP

    With Nigeria and Lybia losing production along with Venz, it will take a big spike in OPEC/Rusian production to keep the world’s economy going. Throw in Trump’s politics with Iran and we’re talking a 2 mbpd shortfall.

  3. Cloggie on Thu, 21st Jun 2018 1:33 am 

    The higher the price of that toxic sludge, the better it is for everything and the more competative alternatives become.

    $100+ please.

  4. print baby print on Thu, 21st Jun 2018 4:27 am 

    I dont get it why somebody sell stuff which posses in limited quantities for less when he can sell it for more just to wait for a while. I know it is not that simple but in the end comes to this

  5. print baby print on Thu, 21st Jun 2018 4:31 am 

    And the stuff that everobody wants . I have never heard of even one barell throwed away because there are no customers

  6. deadly on Thu, 21st Jun 2018 5:16 am 

    I demand more oil production. Places like Boulder, Colorado, have one occupant per car, more so than not, and that status must be maintained, no exceptions.

    I want my Subaru Outback to tool around the Rockies and there better be some more gas for the tank or I am taking hostages.

    Oil from the Baku region was being used 1600 years ago and has many uses that will not go away.

    Human civilization will collapse without oil.

    Every skyscraper on earth will be abandoned and those who are left will be using shovels and hoes to earn their daily bread.

    It could get that bad if people are stupid enough to believe that abandoning fossil fuels will save humanity.

    It spells doom.

    Biofuels will supply agriculture and coal will fuel trains and power plants. It won’t be so bad for the one billion who are maybe lucky enough to survive an oilpocalypse.

    Of course, that is not going to happen and petroleum will be supplied and the markets will exist. Aramco rises to the occasion and saves humanity each and every day. They’re heroes, drivers in Boulder will give them the thumbs up.

    That is the post-modern era way. Boulder car owners, one occupant per vehicle, can rest easy. They can remain in their safe space, sheltered in place, and it is just a better world.

    All is well just as long as there are one hundred million barrels of oil and 20 million tons of coal to supply the energy needs of civilization.

    If you don’t know that by now, you’re clueless. lol

  7. twocats on Thu, 21st Jun 2018 8:42 am 

    print baby – you might want to think a bit more about the situation.

    many ways to think of it –

    1) SA has budgetary needs.

    2) supply and demand curves – if I can sell a 150 barrels at $40 vs 100 barrels at $50 – have to weigh long-term view with short term needs

    3) global economy – if the economy can run 2 more years at $70/barrel vs 3 years at $80/barrel – which would be better?

    lots of factors.

  8. twocats on Thu, 21st Jun 2018 8:42 am 

    sorry switch those years – you get the idea

  9. print baby print on Thu, 21st Jun 2018 9:08 am 

    Yes twocats a lot of factor and I am really not good in math but every barell you sell you can not make it it up any nore is gone forewer so better sell it as expensive as possible , but I admit I am not good in math so maybe I am realy wrong here

  10. twocats on Thu, 21st Jun 2018 9:32 am 

    there is a myth regarding the wealthy’s ability for delayed gratification. but the main reason this is true because they always believe there will be more – that they will never go deprived of even their most obscure needs.

    so their very nature makes them unable to truly comprehend risk. sure they have the camel, car, airplane proverb, but they tell this proverb from the back of their limos smoking cigars with a trafficked woman.

  11. Dredd on Thu, 21st Jun 2018 12:24 pm 

    Don’t forget that they are part of a Mass-Murder / Suicide cult (MOMCOM’s Mass Suicide & Murder Pact).

    MOMCOM is Oil-Qaeda’s bitch.

  12. print baby print on Thu, 21st Jun 2018 3:06 pm 

    twocats this is why we are doomed https://www.facebook.com/1046467668801126/videos/1668454123269141/

  13. twocats on Thu, 21st Jun 2018 6:55 pm 

    the video quality is terrible – but the responses are hysterical. that’s the worst of those that i’ve ever seen but I did learn one thing – americans want to invade the shit out of australia.

  14. twocats on Thu, 21st Jun 2018 7:04 pm 

    was better on youtube…

    https://www.youtube.com/watch?v=a0TK_vk-XDM

  15. MASTERMIND on Thu, 21st Jun 2018 7:19 pm 

    Twocats

    As Sara Palin would say those are “Gotcha Questions”…

    LMFAO!!

  16. Rich Diana on Thu, 21st Jun 2018 8:41 pm 

    Never heard much on Prince MBS being wounded and out of the spotlight for awhile. He’s back in the public eye again as if nothing happened. I would think that if there was a mini revolt by his retained, tortured , and rolled relatives it must be kept hushed up so as to not to spook the IPO suckers,, er,, investors.

  17. print baby print on Fri, 22nd Jun 2018 1:09 pm 

    thank you two

  18. JuanP on Fri, 22nd Jun 2018 2:04 pm 

    OPEC + to increase production by 1 mbpd according to RT
    https://www.rt.com/business/430581-oil-prices-opec-russia-production/

  19. JuanP on Fri, 22nd Jun 2018 2:09 pm 

    Boat “With Nigeria and Lybia losing production along with Venz, it will take a big spike in OPEC/Rusian production to keep the world’s economy going. Throw in Trump’s politics with Iran and we’re talking a 2 mbpd shortfall.”
    Good points, Boat! The jury is still out on how much the US sanctions will affect Iran’s oil exports, though. With the global markets so tight there may be buyers for all the Iranian oil, particularly with price incentives and long term contracts.

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