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Page added on November 20, 2014
Saudi oil policy uncertainty unleashes the conspiracy theorists
* Market debates if Saudis will no longer defend oil prices
* Private briefings, long Naimi silence puzzle OPEC experts
* Conspiracy theories abound about what Riyadh is up to
If Saudi Oil Minister Ali al Naimi wants to stop conspiracy theories spreading before a crucial OPEC meeting next week, it’s too late.
Naimi’s intervention last week after a two-month silence failed to address a question energy markets want answered: is the OPEC leader no longer willing to defend oil prices which have dived by a third to their lowest since 2010, and is it pursuing new commercial or even geopolitical goals?
Despite Naimi’s insistance that Riyadh wants stable markets, diplomatic and market sources say Saudi officials told recent private briefings that the kingdom can live for some time with current, or even lower, levels.
Reading Saudi oil policies has long been like Kremlinology – understanding the politics of that other secretive power, Russia. The next OPEC meeting on Nov. 27 is taking this art to a new, higher level.
A number of explanations have been offered to fill the information vacuum on Riyadh’s intentions and they aren’t all from the usual conspiracy theorists in Russia and Iran, which are at loggerheads with the kingdom.
Oil market watchers are divided on the outcome of the meeting in Vienna. Predictions range from a large OPEC production cut to revive prices through a small cut to none at all.
Even those who have known Naimi for decades are puzzled. “For the first time, I really do not know what is likely to happen at the meeting. It is not clear,” said a long-serving senior OPEC delegate.
When Naimi finally spoke on Nov. 12, he said Riyadh’s desire for stable markets had not changed. “Saudi oil policy… have been subject a great deal of wild and inaccurate conjecture in recent weeks. We do not seek to politicise oil … For us it’s a question of supply and demand, it’s purely business,” he said.
According to four market and diplomatic sources, who asked not to be named, Saudi officials briefed OPEC watchers privately in New York and Riyadh in September and October.
Nasser al-Dossary, Saudi Arabia’s national representative to OPEC, Naimi’s deputy Prince Abdulaziz bin Salman and the kingdom’s OPEC governor Mohammed Al-Madhi attended at least one of these meeting to give the message that, with its large currency reserves, the kingdom was prepared to withstand oil prices as low as $70-$80 per barrel for up to a year.
Benchmark Brent crude oil slipped to $79 on Tuesday.
Most members of the cartel apart from Saudi Arabia need much higher prices to balance their budgets but ironically are unable or unwilling to reduce their output to counter a global glut caused by slowing economic growth in China and Europe, just as U.S. oil production booms.
SEEING OFF SHALE OIL
Should the Saudis tell fellow OPEC members, badly suffering from the oil price collapse, that they will not cut output, debate will intensify on what prompted the policy shift.
One possibility is Riyadh wants to see off U.S. shale oil, which is believed to need much higher prices than conventional production to remain competitive. “They are after U.S. shale,” said one participant in the meetings with Saudi officials.
However, the source added that the Saudis might also regard low prices as an opportunity to put even more pressure on Iran and Russia for supporting Syrian President Bashar al-Assad, an arch-enemy of Riyadh, in the country’s civil war.
Several Saudi oil sources have denied over the past month that geopolitics are now driving the policy, but they have failed to stifle theories that Riyadh and Washington are working together to hold down prices.
“What is the reason for the United States and some U.S. allies wanting to drive down the price of oil? To harm Russia,” Nicolas Maduro, president of fellow OPEC member Venezuela, said last month.
Masoud Mirkazemi, an Iranian lawmaker and former oil minister, said Riyadh was helping the G20 group of major economies. “Saudi Arabia, which intends to manage OPEC, serves the interests of the G20 group,” he said.
“GLOBAL OIL WAR”?
In Russia, the idea of a Saudi-U.S. plot against Moscow has become common currency as the economy struggles under the effects of low oil prices and Western sanctions imposed over its annexation of Crimea and support for rebels in eastern Ukraine.
Leonid Fedun, a co-owner of private oil firm Lukoil, cited President Barack Obama’s visit to Riyadh in March. “Obama travelled to meet the king of Saudi Arabia just after the Crimea events to push him to these actions (to lower the oil price),” Fedun, whose firm has large U.S. assets, said last month.
Russia and Iran routinely allege U.S. plots against their economies, but the conspiracy theories are spreading.
“Is it just my imagination or is there a global oil war underway pitting the United States and Saudi Arabia on one side against Russia and Iran on the other?” New York Times columnist Thomas Friedman, wrote last month.
U.S. Secretary of State John Kerry sidestepped the issue after a trip to Saudi Arabia in September. Asked if past discussions with Riyadh had touched on Russia’s need for oil above $100 to balance its budget, he smiled and said: “They (Saudis) are very, very well aware of their ability to have an impact on global oil prices.”
22 Comments on "Saudi oil policy uncertainty unleashes the conspiracy theorists"
Plantagenet on Thu, 20th Nov 2014 8:30 am
The writer’s suggestion that Obama and the Saudis have conspired to crash the oil Markets to damage Russia is not beyond the realm of possibility.
paulo1 on Thu, 20th Nov 2014 8:35 am
Conspiracy, a plan, or dementia.
bobinget on Thu, 20th Nov 2014 9:22 am
Tired of hearing of China’s ‘slowdown’ as one of the chief causes for gluttony. I simply asked Google.
(china imported 18% MORE crude this October
then last)
http://insideclimatenews.org/todaysnews/20141110/china-has-refined-taste-oil
Platts:
http://www.platts.com/latest-news/oil/singapore/china-is-net-exporter-of-oil-products-in-october-27813007
(this conspiracy theory)
Boys and girls, for almost a year, since Putin elbowed back into Crimea and later Ukraine,
I’ve been waiting for KSA to precipitate a crisis in oil markets. I maintained then as now, Putin’s people better at chess. Ukraine is a misdirection.
What forces control Iraqi, Syria, Libya, Yemen, future production of paramount importance.
This coming OPEC meeting may not be the last
but we can be certain it will be stormy.
buddavis on Thu, 20th Nov 2014 9:57 am
Book written years ago called Victory made the same claim. During the cold War, the Saudis and the Reagan Administration conspired to drive prices down to cripple the Soviet economy. Pretty good book and well sourced.
http://www.amazon.com/Victory-Administrations-Strategy-Hastened-Collapse/dp/0871135671/ref=sr_1_2?s=books&ie=UTF8&qid=1416498847&sr=1-2&keywords=victory
rockman on Thu, 20th Nov 2014 11:04 am
“But there’s a competing narrative, or “conspiracy theory” if you prefer, that the Saudis are waging war in cooperation with the United States”. As usually all I can do is grin at such stupidity. Just to remind folks one more time: the US govt, the supposed coconspirator with the KSA, doesn’t produce a single bbl of oil. In fact, in the short term of less than a few years, it has no influence at all over the amount of oil produced in the US. And thus they have no influence over the price of oil in the US. Even the debate about the US govt allowing oil exports isn’t relevant: the US exports the equivalent of 1 BILLION bbls of oil per year in the form of refined products. Refined products for which there is no export ban. Consider this: if the US govt suddenly banned refined product exports what would the US refineries do? They just lost a significant share of their market. Which means they would cut their oil acquisition by 1 BILLION bbls of oil per year. Which means US oil producers would lose buyers for 1 BILLION bbls of their production per year. So obviously they would have to lower the prices they offer the refiners to grab a portion of that market. And just as obviously the only mechanism for doing that would be to cut their prices.
By the US govt allowing the export of the equivalent of 1 BILLION bbls of oil per year they are supporting the revenue stream of US oil producers as well as the refineries. But by putting that 1 BILLION bbl of oil equivalent into the global market place they are also putting downward pressure on the price the other oil exporters can charge. But remember: the US govt didn’t just begin allow product exports in hopes of hurting Russia/Iran: product exports were legal long before the current issue developed.
So indirectly the US govt is causing lower global oil prices. But is their prime motive to bolster the profit of US oil companies and refiners or to damage the revenue stream of Russia and Iran? But remember it would damage the revenue stream of all oil exporters…including hurting the KSA in absolute $ terms more than any other oil exporter. So the assumption is that the KSA and the US are conspiring to reduce the KSA income: according to the EIA a $20/bbl decrease in oil price will reduce the KSA’s oil export revenue by $70 BILLION per year.
So the logic is the KSA govt is willing to give up $140 BILLION in export revenue (with 85% of the total KSA export revenue coming from crude oil sales) for a couple of years. And what exactly would the KSA gain by doing so? Hurt the Russian economy? How does that benefit them? Hurt the Iranian economy? So it’s going to benefit the KSA to destabilize the govt of a country readily accepted as their biggest threat in the region??? So pissing off the Iranian people even further is a good thing???
Don’t get me wrong: nothing bad about an intriguing conspiracy theory. It just needs to make sense. Oil is selling for its current price because that’s the max the refineries estimate they can pay based upon their projection of the future market for their products. ExxonMobil doesn’t decide what price they charge at the pump for gasoline…the market does. XOM refineries decide what they will pay for a bbl of oil based upon what they anticipate they’ll be able to sell their products for.
Simple marketing economics…no conspiracies required. LOL.
Plantagenet on Thu, 20th Nov 2014 11:51 am
Any conspiracy would not involve the US government selling oil because the US government doesn’t sell oil. The hypothesized conspiracy would involve some kind of deal between the US and SAUDI ARABIA—which does indeed sell oil. KSA is nominally the “swing” producer, ie. KSA usually modulates their own own oil production to keep oil prices in a stable band. But now KSA has kept their oil production high and actually lowered the prices they are charging on the open market…both actions driving oil prices lower.
GregT on Thu, 20th Nov 2014 11:52 am
There is no good reason for the KSA to not cut production to maintain higher oil prices. This is nothing more than a last ditched attempt at maintaining USD hegemony in the race to the bottom for the world’s economies. At best, a temporary fix. At worst, a precursor to further conflict and wars.
I’m with Bob on this one, November the 27th is sure to be a turning point in history. I’m stocking up on Orville Redenbacher’s.
ghung on Thu, 20th Nov 2014 12:34 pm
Bob: “china-is-net-exporter-of-oil-products-in-october”
Could it be?
Iran leases oil storage in China; ships crude to India from there
http://economictimes.indiatimes.com/industry/energy/oil-gas/iran-leases-oil-storage-in-china-ships-crude-to-india-from-there-sources/articleshow/45215470.cms
“NEW DELHI/BEIJING: Iran leased oil storage at Dalian port in China earlier this year and has made at least two deliveries of crude from there to India and one to South Korea, according to sources with knowledge of the matter.
Iran, besides having to cope with western sanctions that have cut its oil exports by more than half, has been battling along with other Middle East producers to hold onto market share in Asia as softening global prices have hit its economy.
Saudi Arabia and the United Arab Emirates have already been leasing storage in Japan and South Korea for a number of years to give them supply depots near their largest customers.
Iran’s lease of oil storage in China came to light in August when Indian customs questioned state oil company National Iranian Oil Company (NIOC) about a cargo of crude for delivery to Mangalore Refinery and Petrochemicals Ltd, said an Indian government official and industry source.
Also:
China releases first formal estimate of strategic oil reserves (FT)
http://www.ft.com/intl/cms/s/0/09c47d8e-7084-11e4-8113-00144feabdc0.html#axzz3JfYsn9zx
I’m sure China is taking advantage of lower oil prices to max out its reserves.
shortonoil on Thu, 20th Nov 2014 1:12 pm
Bogey men under the bed make for better press than reality. One rarely finds the word depletion mentioned by the media. Instead we hear the Saudis are trying to undermine US shale, beat up on the Russian’s in a conspiracy agreement with the US President, punish Iran because they follow that other religion, and under mine Assad. Like Goldman Sachs, they have decided to repent, and do the work of Allah!
Actually the real situation is much simpler; depletion has cut into the maximum price that the economy can afford to pay for oil, and the price is going down as a result:
http://www.thehillsgroup.org/depletion2_022.htm
No Bogey men needed. Of course, that doesn’t make for very good press!
http://www.thehillsgroup.org/
Northwest Resident on Thu, 20th Nov 2014 2:07 pm
Commodities prices are falling for the second year in a row. It is no surprise to see oil falling in tandem with commodities prices. Falling oil and commodities prices are reflective of decreasing global demand for products produced from those commodities (all powered by oil of course).
All the speculation and rumor mongering that USA and SA are conspiring to lower oil prices to achieve foreign policy goals is just buying into the misdirection and propaganda that the MSM is pumping out on behalf of TPTB who, above all else, want to obscure and hide the fact that we are entering a period of economic shrinkage from which there is no escape.
Commodity producers face second year of falling prices
Prices of the main commodities – energy, metals, agriculture and fertilisers – are expected to decline for the second successive year in 2014, the World Bank said on Thursday.
http://www.ft.com/cms/s/0/092f2b5a-89d8-11e3-abc4-00144feab7de.html#axzz3JdkSpI1y
Falling oil and commodities prices also provide excellent cover for operators of the US Shale Ponzi schemes to scoot away from the huge losses their investors are incurring and will incur in even greater amounts as it all unravels. “Hey, we were doing great, we were making profits until those dastardly Saudis cut the price of oil and killed our business. How could we possibly have known they would do that to us?!”
It also looks like “Oil industry risks trillions of ‘stranded assets’ on US-China climate deal” — providing additional cover to shale Ponzi scheme operators who always knew there was ZERO chance of turning in a net profit. Just buying time, throwing one big going away party to put a bunch of cash in everybody’s pocket, one last time. Then lights out. End of the Age of Oil. Let the Age of Oil Hangovers begin.
“A study by the US Energy Department found that the world’s leading oil and gas companies were sinking into a debt-trap even before the latest crash in oil prices. They increased net debt by $106bn in the year to March – and sold off a net $73bn of assets – to cover surging production costs.
The annual shortfall between cash earnings and spending has widened from $18bn to $110bn over the last three years. Yet these companies are still paying normal dividends, raiding the family silver to save face.
This edifice of leverage – all too like the pre-Lehman subprime bubble – will surely be tested after the 30pc plunge in Brent crude prices to $78 since June.
Prices could of course spike back up at any moment. Data from the US Commodity Futures Trading Commission show that speculators have taken out big bets on crude oil futures. NYMEX net long contracts have reached 276,000. This is a wager that the OPEC cartel will soon cut output.
Yet there is little sign so far that the Saudis are ready to do so on a big enough scale to make a difference. JP Morgan expects US crude to slide to $65 over the next two months, a level that could lead to a “cumulative default rate” of 40pc for the low-grade energy bonds that have financed much of the fracking boom, if it drags on for two years.”
http://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/11242193/Oil-industry-risks-trillions-of-stranded-assets-on-US-China-climate-deal.html
rockman on Thu, 20th Nov 2014 3:29 pm
“There is no good reason for the KSA to not cut production to maintain higher oil prices.” I can think of one: if they cut production that higher price won’t produce as much income as a lower price combined with higher sales volume.
Mercedes could cut the production runs of their X model in half and raise prices. But while they might sell cars at a higher price their income from that line might fall if they don’t sell enough cars at that higher price.
Most sellers of a product look for that sweet spot where the unit volume X the price produces the max income. Given how the Saudi govt is so dependent upon oil export revenues to take care of its citizens I suspect they are more concerned about how much revenue they bring in then what they sell a bbl of oil for. IOW selling oil for $150/bbl is a nice price. But if that price kills enough demand they’ll earn less income then if they sold oil for $100/bbl .
shortonoil on Thu, 20th Nov 2014 3:48 pm
This is a wager that the OPEC cartel will soon cut output.
Yet there is little sign so far that the Saudis are ready to do so on a big enough scale to make a difference.
If the Saudis suspect (and we think they do) that oil prices are in long term decline, why would they cut production now just to receive lower prices in the future. If any cuts are made they will likely be token. They would be made for the purpose of mitigating criticism of their inaction. We’ll know in a week when OPEC meets.
shortonoil on Thu, 20th Nov 2014 4:03 pm
I can think of one: if they cut production that higher price won’t produce as much income as a lower price combined with higher sales volume.
That is exactly right! If a cut in production is not compensated for by a great enough increase in price to make total revenue the same, they will not cut. The Saudis know they hold the upper hand, they are not going to jeopardize their position to save Venezuela!
rockman on Thu, 20th Nov 2014 4:06 pm
shorty – Exactly. The KSA has to play the long game. They might take some short term (6 – 12 months) supperficial actions but they are looking at economic models running out at least a couple of decades.
J-Gav on Thu, 20th Nov 2014 4:10 pm
Short – Yeah, that’s pretty much the way I see it.
Dredd on Thu, 20th Nov 2014 4:22 pm
In the American system of justice, crimes have to be proven “beyond a reasonable doubt.”
In other words, only unreasonable people would not see the crime that was committed.
“In fact, you might be surprised how many conspiracy theories are handled by the federal and state governments on a daily basis:
Over one-quarter of all federal criminal prosecutions and a large number of state cases involve prosecutions for conspiracy.
(Conspiracy Theory, 112 Yale L.J. 1307 (2003), Preface, emphasis added). That is a lot of real, serious as a heart attack, beyond a reasonable doubt, and well documented occurrences of ‘conspiracy theories’ going on in reality before the eyes of anyone who wants to see them.” (On The Origin of Conspiracy Theory).
The mystical meme anti “conspiracy theory” was created by the CIA for the main stream media to feed to unreasonable people (RE: CIA Document #1035-960).
If conspiracy theory implementation were perfect, always making sense and executed intelligently, then 25% of all federal criminal prosecutions would not take place.
Does that mean that 75% of such criminal conspiracies are not detected and therefore take place under the radar?
Dave Thompson on Thu, 20th Nov 2014 4:40 pm
Reuters article heading, includes “conspiracy theorists” in title. Auto bullshit meter on 11. Skip story, as there is no need to read further.
Dredd on Thu, 20th Nov 2014 5:25 pm
“Does that mean that 75% of such criminal conspiracies are not detected and therefore take place under the radar?”
No.
It could be more or it could be less.
Boat on Thu, 20th Nov 2014 7:28 pm
http://www.eia.gov/dnav/pet/pet_move_wkly_dc_nus-z00_mbblpd_w.htm
Rock, sure you didn’t mean 2 billion?
Boat on Thu, 20th Nov 2014 7:36 pm
My theory, the Saudis funded ISIS and when they beheaded 2 Americans they let oil prices drop in repentance. In exchange we round up the international response to behead the infidels.
Ralph on Fri, 21st Nov 2014 5:44 am
I think Short has got the best interpretation. Saudi Arabia has realised that the global economy is going down for several years because it cannot sustain $100 oil, so cutting production would lose income and market share, whilst only delaying future price falls. Better to keep pumping now, and drive marginal producers (mostly US shale, tar sands and deep water) out of the market. Then they will have a bigger cut of a smaller market, 4 or 5 years from now. They will be back in control.
rockman on Fri, 21st Nov 2014 9:30 am
Boat – “Rock, sure you didn’t mean 2 billion?” I don’t see where I refereed to “2 billion”. What was the context? Thanks for the heads up if I did misquote…it does happen from time to time. LOL.