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U.S. Returns Fire in Saudi Arabia’s Oil War

U.S. Returns Fire in Saudi Arabia’s Oil War thumbnail

One day after Saudi Arabia declared war on U.S. oil producers by lowering prices in an attempt to dump cheap crude in the United States (US) market, the White House and private oil companies responded.  White House spokesman Josh Earnest said that the U.S. is monitoring the global oil supply and demand situation but has no comment on whether it might look at replenishing the Strategic Petroleum Reserve. Then, later in the day, the Wall Street Journal reported that BP is going to export ultra-light crude without the permission of the U.S. government in a move that not only starts to breakdown the US export ban, but also is a direct challenge to OPEC and other producers for market share.  Both of these developments temporarily gave support to the petroleum complex, but it still was not enough to overcome the perception of overwhelming supply and Bank of Japan Gov. Haruhiko Kuroda’ s prescription against the disease deflation.

Let us start with the White House comment on the Strategic Petroleum Reserve (SPR) that was obviously a thinly veiled message to Saudi Arabia. It was an attempt by the White House that they were not very happy with the Saudis price discounts and to remind them that there are steps that the U.S. can take to retaliate in the production war. Up until yesterday sources in SPR had said that the White House was actually looking into reducing the size of SPR, which currently holds about 690 million barrels by about 10 million barrels to about 590 million barrels. The need for SPR oil has been reduced because of the rise in US oil production. The Saudis feared that the U.S. dumping 10 million barrels of heavy crude into an oversupplied market would cut right into their bottom line.

Now what the U.S. may do is buy crude to offset a price collapse caused by Saudi dumping and support U.S. shale producers. It could also go further, tacking on a tax on Saudi oil, an issue that would at some point go before the world trade council. Of course, we are not there yet, but that was the message.

The Saudis other nightmare is the lifting on the U.S. oil export ban, which already is falling apart. How to define what is crude and what isn’t crude is harder as U.S. shale oil is so light in gravity it floats above the normal West Texas Intermediate scale. The Wall Street Journal reported that BHP Billiton cut a deal to sell about $50 million of ultralight oil from Texas to foreign buyers without formal government approval. The Journal says that this may “be only the first of many such moves as energy companies seek new  markets and higher prices for the surge of crude now pumped in the U.S.”

If the U.S. government remains silent and uses as a loophole the high quality of oil as not fitting the definition of crude oil it will open up the floodgates and unleash U.S. shale oil into the world. The Saudis have seen the writing on the wall and that is why we are seeing these acts of pumping desperation in an attempt to save some of their threatened market share.

Yet there are also other forces driving down oil that closed yesterday at the lowest level since June of 2011 and a RBOB future that closed at a 4 year low. Central Bank Medicine! Bank of Japan Gov. Haruhiko Kuroda sent the Yen tanking and the dollar to new heights after he said BOJ is determined to do whatever it takes to hit the inflation target in two years.  He went further by saying that  “In order to completely overcome the chronic disease of deflation, medicine should be taken until the end,” “Half-baked medical treatment will only worsen the symptoms.” So the markets are drinking the Kool-Aid and while he may be popping up Japans stocks but it is making many commodes look sick, especially gold and silver. So if it is a war against deflation then shouldn’t commodities go up if you have the right medicine? I mean tanking gold prices don’t really signal inflation, now does it. Of course many commodities will be more expensive in Yen terms yet the base is falling. Maybe I need some of that Japanese medicine or at least whatever Gov. Haruhiko is drinking.


61 Comments on "U.S. Returns Fire in Saudi Arabia’s Oil War"

  1. T. Hofstetter on Thu, 6th Nov 2014 6:04 pm 

    Why is the market and all of you so against giving the American people affordable gasoline? Price should not exceed .60 cents gallon. Oil should be considered a national resource, owned by the American people, and not one drop should be allowed to be exported until our needs are met at the above price. I really don’t give a damn how much they charge for a barrel of crude if our needs are taken care of first. If obama or other entities are going to manipulate the oil market, do it right and take full control in f the industry, protecting our needs first. To hell with the ezt of the world. Let them be the saudis bitches.

  2. Davy on Thu, 6th Nov 2014 6:14 pm 

    Geeze, I just read through several comments that are really far off from opinions from who I consider site experts on POD.

    I read some that fail to understand oil is a global commodity and not controlled by any one country and or much control from opec anymore. I read comments with the usual misunderstandings of the American market place.

    No wonder the news is as it is for and against PO. I doubt there are but a few percent of the population that have a clue what is gloing on with oil both domestically and internationally.

  3. GregT on Thu, 6th Nov 2014 6:38 pm 

    Judging from some of the comments here today, I doubt that there is more than a tiny percentage of the population that has much of a clue about anything at all.

  4. Dave Jones on Thu, 6th Nov 2014 7:13 pm 

    We should rename the United States of America to Saudi America.

  5. rockman on Thu, 6th Nov 2014 7:19 pm 

    “White House was actually looking into reducing the size of SPR”. And here we have another one of toes pesky facts: the White House can’t sell any oil out of the SPR without replacing it shortly afterwards. Nor can the White House with the blessing of every member of the House and the Senate sell any oil out of the SPR without replacing it shortly afterwards. The rules governing the SPR are not some regs written by the Dept of Energy. They are a CONGRESSIONAL LAW. The LAW is very long and very complex covering provisions that 99.9% of the public haven’t a clue. Want to change any of the rules even a little bit? No problem: just takes a full and public vote of both Houses and the signature of the POTUS.

    If you have days of your life you’re willing to sacrifice here’s what looks like a simple link:

    Keep opening the sections and read… and read…and follow the additional links. One might think the gov’t would make it easier for the public to read the really important aspects of the law, wouldn’t you? There are details that would shock folks…like how much of the SPR is solely reserved for the DOE and not the public.

    Go ahead…find a copy of the law. It will be an interesting process given how critical it is to every citizen and how “open” our gov’t documents are to the public. Feel free to post when you find it.

  6. Andy on Thu, 6th Nov 2014 7:57 pm 

    Apparently we have government officials that have never taken a business class.

  7. Will on Thu, 6th Nov 2014 9:18 pm 

    Given the fact that there’s no way to ever verify this, and every crooked politician knows it…how many of you believe that all the oil we’ve paid for, is actually down the hole in “the strategic oil reserve?” Think about the implications here.

  8. DBrass on Fri, 7th Nov 2014 2:26 am 

    My bet is that the Saudis are well aware that US Shale boom is a dry hole, mainly natural gas (strategic BS).

  9. PermReader on Fri, 7th Nov 2014 4:24 am 

    If 690 – 10 = 590 then the author`s analyses may be true.

  10. Scott South on Fri, 7th Nov 2014 8:07 am 

    BHP Billiton couldn’t make a good choice from Houston if their GD life depended on it. Everything they say just about is BS

  11. synapsid on Fri, 7th Nov 2014 7:02 pm 

    Scott South,

    You do know that BHP Billiton is an Australian mining company, maybe the largest in the world? About 20% of their income is from petroleum, but the company is hardly constrained by Houston, whatever you mean by “Houston”.

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