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

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

Comments

JailBanksters Wed, 06/20/2018 - 18:51 Permalink

$80 just happens to be the point to make shale oil and fracking become profitable.

Until that point they are sinking more money into getting the oil out than what they can sell the Oil for.

RationalLuddite hxc Wed, 06/20/2018 - 19:32 Permalink

"Both of you are wrong.

Saudis need $20/barrel

USA only needs $120/barrel, largely because of fracking and shale."

Do you see how unevidenced assertion works? Anyone can inserted random numbers and say it arrogantly (don't conflate with confidently) to gaslight the totally ignorant.  However, the way you did it tends to be the a priori assumption of self-delude an egotistical,  narcissistic or solipsistic mentalities that believes reality comes into being by the mere assertion by their god-like wisdom.

Look at your projecion here - look at the likely suppressed premise. Your assertion told us nothing about the nature of the oil industry,  nothing.  But it does tell us something about the knowledge level  and psychology of the person asserting it - delusional, egotistical attempt at truth  by assertion. In short - low intelligence with narcissistic traits.

 

You clearly don't know a fuckin thing about thermodynamics or the oil industry, but a sincere thank you for a nice diagnostic opportunity and example of probable Dunning-Krugger assuredness and likely pathalogical narcissistic traits. 

 

P.s. if you don't have a good grasp on something,  listening to others and researching further is a good path forward rather than trying to bluff this crowd.

 

In reply to by hxc

hxc RationalLuddite Wed, 06/20/2018 - 19:42 Permalink

Nice projection there, dickhead! You can't even spell pathological, much less use it correctly in a sentence.

That being said, US oil is profitable at far lower oil prices than saudis/opec. I know the difference between an argument and an assertion, btw.

Calling other people egotistical for simply posting something you disagree with on ZH is probably not the best way to get your point across, but I get it. Go ahead, Oil God, tell me whether crude is headed up or down.

BTW - nothing i said was derived from a priori reasoning. If you even know half these terms you're using. If you're so gung-ho on anyone typing a number backing it up with citations, show me the evidence dude. A posteriori / empirical reasoning, right?

In reply to by RationalLuddite

RationalLuddite hxc Wed, 06/20/2018 - 20:12 Permalink

Note the way you pick on a spelling mistake and dispute the definition of two words rather than address the substantive issues. Shows a dishonest and cowardly intellect, yes? Pick on trivial side issues and respond with a slur ("dickhead") rather than address the core of my empirical diagnostic of your supressed premises, your psychological projections. Expecting people to accept your Truth by assertion is by definition egotistical - you are relying not on logic nor evidence,  but on reputation or sense of self or sophistry to 'prove' your point, assert it, tyrannically even. By definition you attempt was egotistical. My use of egotistical is thus not a facile slur but an excavated implicit character of your statement and approach. Regardless of what you said. You are clearly ignorant on oil, but that is a second issue. Your limbic response suggests i touched a nerve. After pointing out that you lack evidence for what you assert, you don't respond with evidence nor refuting my core point about your approach, but attack me and pick on spelling mistakes.  Reinforces my narcissistic traits suggestion in truth, where anyone with the temerity to challenge the cluster b with accountability is devalued for the treasonous act of not submitting to their control or desires. 

I diagnosed you, not ad hominem turd flinging. I haven't the time to parse the rest of your nonesense here at the mo, but i will correct my understanding of a priori if i misapplied it. I do that sometimes when in a rush.  Always learning. Sorry about that. 

Thanks for the feedback,  but also thanks for the performace confirmation of the core of my suggested analysis about your psychology. Seriously. 

 

----

"Thus, the two kinds of knowledgejustification, or argument, may be glossed:

There are many points of view on these two types of knowledge, and their relationship gives rise to one of the oldest problems in modern philosophy."

 

 

In reply to by hxc

JailBanksters hxc Thu, 06/21/2018 - 00:19 Permalink

Get the Frack outa 'ere

Fracking is so fracking expensive because the Holes don't last long before they dry up, and they have to create a new hole. Who pays to keep drilling all these holes, Tax Payers. In other words Cheap Oil is being subsidized to the Oil Companies by you. Then there is all the ecological and environmental problems of fracking, but the needs of the shareholders out weighs the needs of the environment.

In reply to by hxc

peippe Wed, 06/20/2018 - 19:25 Permalink

the BTUs from gasoline make it a bargain at $17.00/gallon.

I know, not helping. : (  I'm gonna go ride my jet ski drunk cuz I can.

1033eruth Wed, 06/20/2018 - 19:30 Permalink

GOD FUCKING DAMN IT!!!  Its NOT FUCKING OPEC!!!!! Its the fucking manipulators (central banks and their proxies and who the fuck knows who else) 

Its not fucking OPEC that magically manipulates the price of oil to peak at goddamn Memorial Day and peak fucking driving season.  

JESUS FUCKING CHRIST!!!! I'm tired of the bullshit and the misdirection.  

GOD FUCKING DAMNIT!~~~  Saudi Arabia can make more money in the goddamn commodity markets than they can selling the goddamn commodity.  

FUCK THE GODDAMN PROPAGANDA!!!

motoXdude Wed, 06/20/2018 - 19:47 Permalink

How can you expect them to take less for their oil?  After all, they use the proceeds to make their leaders look more Western in appearance.   Beauty treatments are NOT cheap, trust me... I've spent dozens and I still look like cat sick!

rickv404 Wed, 06/20/2018 - 22:11 Permalink

You mean government's not going to give up high oil prices easily, because it's not going to give up on inflation. Prices have been going back down recently, but I don't expect that to last.