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Oil: The Battle For Market Share & The Saudi's 1985 Playbook
Via BofAML's Jake Greenberg,
OIL: the battle for market share & the Saudi’s 1985 playbook
Stay positioned for “a good sweating” = stay short the SXEP (European Oil & Gas Stocks) and sell rallies
In 1985, the Saudis chose volume over price to defend their market share against new production from the North Sea, as well as cheating/discounting from other OPEC members in a period of weak demand. With Iraqi exports ramping up, in spite of the war with Iran, the Saudis went around the world signing netback deals, which incentivized refiners to buy/produce as much product as possible...the market was oversupplied and the price of oil fell from $31.72/bbl in November 1985 to $10.42/bbl at the end of March 1986. A fall of 69% in four months!
The Saudis had warned the world of their intentions, but many thought “it was merely an elaborate warning designed to scare other OPEC countries and restore discipline.”
See the chart below - the price remained volatile through 1986 and then saw a sustained recovery with the implementation of an OPEC quota system that members actually upheld until 1989. Interestingly, the agreement in 1986 also included cuts from non-OPEC members Mexico, Norway, and the Soviet Union.
In 1985-86, the Saudis gave the market “a good sweating”...WTI fell more than 69% in four months!
The parallels with today’s market structure are hard to miss. US shale has replaced the North Sea as the new entrant to the market, ISIS has stepped in to create the geopolitical tension in place of Iran-Iraq, demand growth is falling, and the Saudi’s essential playbook remains the same:
I agree with the view put forward by Glencore’s head of oil this week that the price will stay low for at least 6-9 months without OPEC intervention, as it will take that time for cuts in capex and investment to make any impact. “The groundwork is being laid for a strong rebound in 12-18 months.”
How low can it go?
I spoke to an industry veteran in the US last week - who was in the market in 1985 - and he thought the absolute floor price would be $35/bbl, which he understood to be the cost to produce globally with positive cash flow, with no investment.
Interestingly, Bloomberg reported comments from Iran’s oil ministry’s head of petroleum market analysis who said this week that Brent could fall to $40/bbl if OPEC does not start to show some solidarity.
Francisco Blanch highlighted the risk that oil could fall to $50/bbl, and explained why we should not expect a decrease in supply, nor an increase in demand for c. 6 months.
Bottom line: Stay positioned for another “good sweating” = stay short the SXEP (European Oil & Gas Stocks) and sell rallies in 2015...
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I hope that someone somewhere is making a list of every corrupted politician and banker responsible for the looting and inevitable collapse of this once great country. And when its done, and misery is the only asset left to the middle class, their names, faces, and crimes are etched on a deck of cards in every household, Baghdad style!
I already have my nomination for the Ace of Spades.
I vote for Mr Mayhem.
Got sucked into that tripe as well did you?
1985.
I remember that period well; since I worked in oilfield engineering at the time.
The Southern California oil industry was decimated. I was fortunate enough to work for a very small engineering and oilfield automation company that thrived only because the large oil companies (ARCO, Chevron, Mobil, Texaco) were down-sizing by eliminating their local in-house engineering departments, and out-sourcing their vastly scaled-down projects to consulting firms like ours.
The number of wells being capped and newly-discovered reserves that were being put on hold was mind-boggling. The entire California oil industry took a tremendous hit and didn't really recover until the 90's.
If OPEC stays the course on this latest production increase, the US oil industry could be looking at another 10-year bear market.
Glad I don't work in oil anymore...
At least the Saudis were able to keep the North Sea oil from coming on line... oh wait. Bakken will stay in production it will just be owned by Goldman and friends.
It really does look that way.
Throw in a few gold miners too
dow2000
There are two America. Which one are you talking about?
You're a 3rd worlder aren't you?.... I say that because your "ellipticals comments" aren't worth a fuck....
Bananamerican
You need to get Curious about some things
Coming Apart: The State of White America, 1960-2010 – by Charles Murray
The top and bottom of white America increasingly live in different cultures, Murray argues, with the powerful upper class living in enclaves surrounded by their own kind, ignorant about life in mainstream America, and the lower class suffering from erosions of family and community life that strike at the heart of the pursuit of happiness.
http://www.amazon.com/Coming-Apart-State-America-1960-2010/dp/030745343X/ref=cm_cr_dp_asin_lnk
1985 playbook... 1985 Playbook.... What is the other 1985 Playbook that we are following????
Oh Yeah, Savings and Loan Crisis.
Yep 1000s of Banksters in Jail, just like then.....
/s
Why not start that list right now
EXK Capitulation
https://www.tradingview.com/x/zbOFmNTY/
not over yet. big uptrend at around 52,70
HAIL
Doubt they keep oil down 12-18 months. More likely a few months max, then jack back up for the spring/summer driving season in the US.
And I thought all the pundits were right when they said "peak oil" for Saudi Arabia five years ago.
Cheap oil will win new Cold War with Putin - just ask Reagan
The son of President Ronald Reagan says the world should learn from his father's secret deal with Saudi Arabia to drive down oil to end the Cold War and stop Vladimir Putin in his tracksMikhail Gorbachev believes the world is on the brink of a new Cold War. If so, this new clash between East and West will be settled in the same way as the last one, which ended with the collapse of the Berlin Wall 25 years ago.
However, it wasn’t political ideology, the failure of Mr Gorbachev’s so called “Perestroika” reforms, or the desire of most people behind the iron curtain to own a pair of Levi’s jeans and listen to pop music that saw the Kremlin’s power crumble.
It was the collapse in oil prices engineered by Saudi Arabia, which literally bankrupted the old Soviet Union and ripped up the post-war map of Eastern Europe that had been brutally created in the aftermath of Adolf Hitler’s downfall by the equally ruthless Joseph Stalin.
http://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/1122002...
maybe some games being played
BUT
EIA keeps lowering forecast demand ... global economy talking ... loudly
Oh, Yeah. Speculators are all in this shit up to their eyebrows. Plenty of games being played. I won't touch it till the bottom is in; talk about beach balls being held underwater.
Hey SAT, what's the best way for a citizen to play CME for the oil bounce on the way back up?
The price is going low and lower because world industrial age is about to collapse.
When I hear all these experts spinning nonsense while betting in a fraud market; how stupid of us to listen to them.
The Industrial Age has peaked. Prepared for an exponential collapse…. Temporarily delayed by $20 dollars oil.
“It's almost worth the Great Depression to learn how little our big men know.”
- Will Rogers
Bingo. When Reagan and the Saudis colluded, it was in the face of growing worldwide demand for oil. It was a real accomplishment to get the price of oil down back then. Today, with the global economy totally fucked, it's amazing that the price of oil stayed up as long as it did.
Something else to consider: back in the 80s, the banks had way less power than they do today. If you wanted to dump the price of a commodity, you had to actually dump physical supply in the real world...hence the required help from the Saudis. Today, banks basically run the commodities markets and set whatever price they feel like setting. The politicians don't run the banks, the banks run the politicians. And the banks don't give a shit about Russia, one way or the other. The price of oil is getting moved down because it is making a lot of bankers rich to do so.
It's not that complicated.
Very few people know what actually happened; even tho it's a part of the public record and can be looked up. Gorby had a big Dollar Interest payment due on a Soverign Loan, and he couldn't make it; he sold East Germany back to the Germans for the price of the whole loan; interest and principle. Swear to God; that's what actually happened. Weird shit happens when nations are bankrupt; We bought the Louisianna purchase from France because they were totally broke; tapped out; skinned. You think they would have sold 1/3 of the United States for peanuts otherwise ?
I logged in to suggest this, glad I wasn't totally off-base. Yeah, basically the Soviet Union was entirely dependent on oil sales to finance it's socialist oligarch structure, so a move like this would have been essentially open geopolitical/financial warfare in the midst of the cold war.
Though, honestly, how the Saudi's were convinced that doing this was in their best interest... not clear to me. I tend to think that that family must have a lot of insane people in it, based on their behavior on the world financial scene.
It's a fact; he sold East Germany back to the Germans; and of course, that brought down the house of cards. That's why the hard liners consider him a traitor; but WTF did they want him to do? See, they don't have a plan B; it's easy to point your finger afterwards and go traitor, traitor ! But, WTF was he supposed to do ? They were totally broke.
I had to uptick you again; although I usually refrain. I think this is basically what's going on.
Seems pretty much a rerun to me...
http://www.dallasfed.org/assets/documents/research/houston/2003/hb0304.pdf
First Putin is aware of that and likely planned accordingly.
Secondly, it gets overlooked that ever weakening of a resource exporter strengthens the resource importers, nowadays especially China.
And possibly puts Russia and China even closer together.
So to sell this as part of some genius' grand master plan is a bit shortsighted.
Only if you aren't farsighted enough to see the real grand master plan.
The grand plan I think I'm seeing has very bright radioactive explosions and makes me want to finf another channel. Sadly the remote doen't seem to change the picture.
Reintroduction of the GM Gremlin next.....oh my fuck!
AMC made the Gremlin. GM should have gone the way of AMC, but alas, union voters must be spared!
http://content.time.com/time/specials/2007/article/0,28804,1658545_1658498_1657865,00.html
Crude future making today's new low at 55.50. Kitco shows 55.31. Don't leave yet:
http://www.investing.com/commodities/crude-oil-advanced-chart
Don't touch it; one way or the other; wait for the bottom. Two things have to happen, enough time has to go bye, and a chart signal has to take place. Right now, all you can do is keep an eye on it and wait.
There's nothing on this monthly crude chart before Dec. '07's $42: my screens say oil, bonds and equities have a lot more price discovery to do, on the downside:
http://www.investing.com/commodities/crude-oil-advanced-chart
Look at people trying to hide out in HYT, as if nothing has gone wrong. In times like these you need a 10 year chart to see how mispriced things have become, thanks to politicized 'money management':
http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=hyt&insttype=&freq=2&show=&time=13
PMs down $30 and 88c today tell me my month old call for $12-14 AG might be coming into view. See the AG monthly pointing to $10-12, spooky as that sounds, and I'll wait and be ready for it, but the PMs today could be pointing the way down for equally spooky further surprise drops in bonds and equities as crazed financiers, drillers and investors are shaken back to reality. My stuff today says we're going over the edge after the fedspeak evaporates into thin air, but who nose?:
http://www.investing.com/commodities/silver-advanced-chart
Silver stayed at five bucks an ounce for a VERY long time.
Still the USA did run out this November (for a few weeks.). Hard to be long commodities when you have a collapse in energy prices (again. Last one being just two short years ago in natural gas.) Wanna see refined copper itself at "yen cents a pound"?
Again I've never traded currencies before (equities, now treasuries) but I do find dollar/yen interesting to follow and wish I had been short yen actually. Now I'm not so sure. At first glance I would think the collapse in the commodity markets is great news for Japan.
Of course they still have to compete with China.
And General Motors....
Anytime I tell people I bought Crude Oil , (CL), on the CME for $11/barrel in 1986, they tell me I'm lying. When I get them to look at the price chart, their mouth falls open and they stare like they were seeing a two headed dinosaur. The point being, that markets do weird shit; shit that you know is wrong; it's just wrong, wrong, wrong, and it's going to be corrected, and if you don't get some money down on it you'll be sorry. I was managing a small account for some friends at the time and i sold everything and bought CL. At the fourth of July weekend, 1986 I sold out the position for more than +600%, net for the whole account. And what did I have to worry about ? nothing. there was never any question about what was going to happen next; the only thing that could possibly happen. Sometimes, Markets just say, hey; want some free money ? here it is, just pick it up. But it's 90% about waiting. Waiting and watching for stupidity to reach it's final climax.
Any thoughts on ProShares Ultra Bloomberg Crude Oil (UCO) as an investment when crude oil (eventually) rebounds?
In the 80's Volker moved the fed interest rates to 17-18% and no other business than oil could support a business at those levels and borrow so the only game that had the margins was the oil and gas business - but ultimately the high rates brought down even the oil business - this time - low rates made everyone move to the oil business again because that was the few havens that could make money - so HY went crazy for yield
but the low interest rates caused excess production and brought down the oil markets again - it is amazing high or low rates and you get screwed
I just LOVE 3:30 "ramps"...
... DOWN!!!
not the first time i've seen comparing our current oil takedown with the the 1980's (or emerging markets cratering with the 1990's asian crisis) and things will work out the same ... don't know about that ... the debt levels (and "financialization") are MUCH greater now ... when things start blowing up (like now) i don't think they can put humpty dumpty back on the fence so easily
Great scott! That's heavy Doc!
Right, and Asia is now consuming more oil with each passing year; the Saudi's will always make their bank with volume.
p.s. - Who shot JR?
deleted.
Maybe this is so. But it is difficult to see oil rebounding to near 100 again, where is the demand going to come from?
They may regret their decision to underprice the competitors.
sschu
only a matter of time ... take enough production off line ... and a few "incidents" ...
It's always difficult to see in the future what is not happening right now. but all you need to know is that the world is WILLING TO PAY $100/ BARREL. And this we do know. The rest is just a matter of controlling supply and a little propaganda and speculation. It'll happen alright.
Maybe, who knows. But what if their desire to undercut the competition causes financial calamity? Unintended consequences.
sschu
I agree that the Saudis may regret this '85 playbook. It is no longer 1985 and they have increased their population by more than 100%. That population is costing billions each month to pay off to avoid an Arab Spring uprising and the Saudis will need to liquidate the national savings to keep the population content. So what happens to Stocks and Treasuries when the Saudis and the other oil exporters are major sellers?
The Fed will just lend them USD to fund their citizens if they need money. Because of the petrodollar, it's best to see the Saudis as just a branch of DC; a branch that owns a LOT of oil and spends a shit load of money but turns around and buys a lot of US debt, with money it gets from all over the world.
it's Tank Time for the DJIA... can't remember the last time I saw a Real Tanking that The Puppeteers didn't prevent.
In 1985 the north sea wasn't "new production". It was pumping 3.3mb and it peaked at 4.4mb in the late 90's. If they hadn't cut production it would have peaked much earlier which is similar to what will happen to shale oil now.
Yes; it was a Political operation; not a demand/supply issue.
A strong rebound in 6-9 months once Saud has achieved its ST objectives.
Yes, in a finite world you can't just keep the vital commodity in a situation of backwardation, even if you are Saud.
What has changed with 1985 is that Chindia now doubles first world demand. And thirty years down the road cheap conventional 30/1 EI/EO oil is depleting fast at 5%/yr attrition rate and all new oil is more expensive and has EI/EO of around 5-10, if not less. That changes everything.
Not adding the ecological sauce to this simple reasoning.
One ace up the sleeves of the Oil majors was the recovery rate with Enhanced extraction (secondary gas/water/CO2 injection) techniques. With that we could increase the reservoir recovery rate by doubling it. AND THIS WAS JEALOUSLY GUARDED SO THAT WHAT COULD REALLY BE EXTRACTED FROM THOSE GIANT FIELDS WAS ONLY KNOWN TO THE INITIATED. That ace up the sleeve of the Oil majors, now of their national rivals like Aramco and Petrobras, is losing its value as depletion rate increases. The Seven Sisters now control less and less of world resources.
This is still an uncertaity factor. What is really recoverable. When the deplation rates are going beyond 5% it means the costs of recovery on a fast depleting reservoir becomes an expensive option. We are now there in conventional oil and the 2040-2050 horizon is not absurd, as also it is not that far away.
Awesome.
US recession "might" throw a monkey wrench into that plan
volumes of wisdom-seems the markets will do some sorting as we use the cheapest oil first...
light sweet baby! i like it light and sweet baby...
maybe the o-obozo could broker a ww cut by every last producer including his pal putin? set up a hot line to chat production and he could golf all around the world whist checking on compliance. yea?
There's a lot moar central bank cowbell to be washed out of shale production and exploration junk bonds this time . Issuances up 900% in the past 10 years alone.
I'll take the over on 12-18 months.
A lot of Oil Play shadow banking cowboys who are all hat and no cows; it'll take time alright.
Saudis won't stop until Iran stops their nuke program. Russia backs off and Assad is crushed. Frackers and their lenders are crushed. Breaking Bad is brought back for another season
sons of anarchy season 7-the queen is dethroned? Jax says fuck it and goes all in; drugs guns and bitchez...ha!
Honey Badger Don't Care
Iran doesn't have a 'nuke' program, if by 'nuke' you mean nuclear weapons.
i am clearly observing price signals telling me we have deflation of production costs loaming on the horizon. what could that be signaling. moar juice baby! fed mtg on cue...
Probably expect a multi-joint-level meeting soon.
Seen in some recent zombie movies.
This is going "bad to the bone".
Good article; plenty of food for thought.
Jan crude options expire tomorrow. The delta force may have to keep on selling futures.
Oil is heading lower...I have targets for just today at 55 bucks and change. I am shorting crude on every weak stab higher.
Just fail to see thee outright deflation in the USA. The war has gone nowhere, interest rates are at record lows and Big Sam just cost us 1.1 trillion for 9 months.
I can see outright DEFAULT however (ala Detroit.). Government monies have clearly not been spent well nor will they continue to be. So far no midcycle slowdown but clearly we have a mid cycle correction. Obamacare has been a disaster as far as the economy goes...huge hit to consumption with zero healthcare to show for it. With the dollar this high "healthcare tourism" looks good to me.
Wow, tyler admits its a supply side Saudi dump...so what has this got to do with the major western economies or markets? Isnt this a positive for every single net importer country in the world? Talk about white swan, I guess people dont remember what a real oil shock was, 1970's, when OPEC cut production and the supply disappeared What a bizarro world this has become.
Let me count you $300 trillion in toxic dollar denominated derivatives and the towel heads that are handcuffed to owning a nice big helping of that why the 1985 playbook don't factor in this time!
Can't believe I'm sayin it but we may see the U.S. Government go off the reservation completely and turn theie sand bound friends in Riyadh and Tel Aviv into "glass figures" if the natives at home get restless enough!
Isn't that always the beauty and discipline of thieves in the end?!!!!
Does anybody find it incredible how oiil prices could move so much so fast? I mean, if the funadmentals were so mismatched, why didn't it adjust earlier? To me, it points to manipulation. Manipulation of oil prices on the high side during the last couple of years to stave off deflation and now letting things adjust rather abruptly to probably where they should have beeen long before now; lower.
I have to think this is directed against Russia; primarily. If correct, prices will be maniuplated back up in 6 months or so before real damage sets in for US oil companies and to a lesser degree others.
Miker - +1!
How stupid are we / do they think we are? We get fucked for years heating our homes at >$4 for heating oil. We get screwed at the pump paying >$4 for anything above regular grade. And then . . . we declare Russia and ISIS our enemy, and the Keystone Pipeline appears days from passing after the '14 elections.
Whoa . . . look at those prices collapse. It seems like some handshake deals are off - or on. ISIS was selling Iraqi oil in northern Iraq to fund their operations. I doubt they can break even at $50/barrel, even with slave labor.
Russia needed every penny of their >$100 / barrel crude seeing as they were cut out of the SWIFT banking system and rapidly forging ties with China and India. Now, Vlad has to say, 'Uhm, can you keep paying us the equivalent of $80/barrel until this passes? '
China thinks, "Uhm, sorry Vlad, we buy a few billion barrels now at $40 - but we'll be back. We still love you."
American oil/shale was just throttling to new highs, but now the well owners are forced to sell their product 'at the well head' for $40 / barrel. And, that was 2 weeks ago. Today, they're probably selling at $35.
Finally, Venezuela & Libya go puff.
Don't you think it's worth 12 to 24 months for the Saudis to sell out, while crushing all other suppliers worldwide?
I bet they'll love it while every American shale company is tied up in bankruptcy court, ISIS, Libya & Venezuela are seeing leaders shot in the back of the head daily, and old man Putin finally gets shown the door. His Oligarchs finally realize they own the country, as long as they team up and pay the hundred of billions they've saved over the past 20 years to keep the army and former KGB from stopping Putin's ouster. Then, they get their country back.
All the while, we'll be bathing in our cheap gas. Best get a 1/2 dozen 275-gallon tanks and store a few year's supply in your basement or a warehouse. After 1/3rd of the world's supply is knocked off-line, and their wells are literally rusting, oil can actually hit $200 per barrel.
Finally, the words "Tesla - he was a guy who was like the smarter but less famous Thomas Edison, right" will burn Elon Musk's ass for the next 20 years, as people wonder just what the fuck they were thinking of paying $80,000 for an electric car.
It's like office buildings on Long Island, NY with electric heat. You can guess they were built in the early 1970s, because it was the only time in history it was a smart idea. Then, they got raped ever since on electric bills.
That's my idea on the whole thing. We'll be giving our first born for black gold again in a few years. But, until then, we'll see 80% of the producers go bankrupt.
Over the last many weeks and months, we have heard multiple times the assertion that Saudi Arabia is repeating the 1985/1986 orchestrated price collapse to gain/maintain market share, and thus by implication, Saudi Arabia is ready to scarify substantial revenues to gain market share.
On the surface, the logic presented above by the media (either by purpose or omission) appears sold but it omits a crucial difference (among several differences) : In 1986, Saudi Arabia did indeed cause a sharp price collapse as it changed its swing policy, but it also substantially increased its exports from 2.3m barrels in 1985 to 3.9m barrels in 1986 or a 70% increase in production as prices declined from an average of $26.5 in 1985 to $14.65 in 1986 or a 55% decline, thus their maneuver was largely revenue neutral. Between 1985 and 1986 Saudi Arabia’s revenues declined by only 6.5% or roughly $1.4B less revenues per year, this was a much smaller drop in revenues than for the rest of OPEC and the rest of the world (except for Kuwait and UAE which followed the same Saudi strategy).
Today, the situation is very different. Saudi Arabia is taking a real hard price cut of over $40 per barrel (from the Brent average the last 4 years) without a corresponding increase in production. Thus, they are losing over 40% of their revenues or over $100 billion per year due to their decision not to swing produce.
Those who believe that Saudi Arabia will maintain this strategy for more than few months are sorely mistaken, if prices don’t adjust higher in early 2015, Saudi Arabia will likely adjust course regardless of whether they have achieved their political goals (even in 1986 they adjusted their production lower in the latter part of the year). The price Saudi Arabia is paying today to maintain its current strategy is too costly in comparison to a slight adjustment in production over the next couple of years. If anything, this price swoon will convince all participants to adhere to their quotas and may even get Russia to pitch in as well, and we will hear once more that the death of OPEC was greatly exaggerated.
Regards,
Nawar