Pricing -- Part III

At the sidebar at the right, near the top, I have a link to the slump in oil prices, 2014 - 2016. From that link, one can see "Pricing - Part I" and then "Pricing - Part II" but it's time for an update. The update will be "Pricing - Part III." The OPEC meeting scheduled for April 17, 2016, will provide much of the basis for Part III.

Updates

June 27, 2016: OPEC has lost a huge amount of revenue in the past year (2015). 

June 26, 2016: has Saudi Arabia just made a huge change in strategy on oil? The tea leaves suggest that Saudi Arabia is making a huge bet taking a new tack. [The third definition of "tack":

change course by turning a boat's head into and through the wind.]

March 29, 2016: The trillion-dollar mistake worsens for Saudi Arabia.

*****************************

From a reader, received March 29, 2015: What will cause oil prices to rise?

Current Status

1. OPEC and Russia are basically producing at maximum rate to get as much revenue as possible to meet their national budget requirements. OPEC countries get 85% plus of their income from oil/gas. They need at least $80 per barrel oil price to meet their minimum financial needs.

2. The United States (and Canada) has surplus production which can be put on the world market. Only 3% of the United States gross national product comes from oil/gas. Only the oil companies, royalty owners and tax revenues suffer from low oil prices. The overall U.S. economy enjoys the benefits of low oil and gas prices.

What Scenarios Are Likely In The Next Two To Three Years?

Scenario #1: the US is the swing producer.

Due to lack of drilling, world crude oil production will decline by 5 to 6% per year. In late 2016 or early 2017, daily consumption of oil will outpace production levels. Price of oil will begin to rise. The U.S. and Canada will start to bring some of their excess production online. At some point the price of oil will stabilize (or begin to fall if production increases surpass consumption levels). At this point, the United States will be in control of world oil prices unless prices go so high that OPEC and Russia can increase drilling and utilize production enhancement to add more new oil to the market. The control of world prices will then be back in OPEC’s hands.

Scenario #2: Saudi Arabia, possibly Russia, remains in control.

OPEC and/or Russia decide(s) to cut production. If Saudi Arabia cuts production by 2 million barrels per day, they would generate 70% more income. 8 million barrels times $80 per barrel = $640 million per day; 10 million bbls times $35 = $350 million/day. In addition, they will still have 2 million barrels in the tank to sell at likely higher prices down the road. I don’t think the “market share argument” holds water (or oil). In this case, the Saudis are back in control of the world oil market.

[Note: If Russia were to be the country to pull two (2) million barrels per day of the market, they would be in the driver’s seat of world oil.]

I don’t think OPEC is capable of keeping their members inline for an across-the-board cut back shared by all members. Russia and/or Saudi Arabia seem to hold the key to forcing high prices.

Additional notes:

(A scenario with the U.S. cutting production was not included due to obvious anti-trust and trade constraint concerns. In addition, increasing gasoline prices would result in cries of foul from consumers and politicians. U.S. production declining due to natural depletion or not completing uneconomic wells is considered normal business practice.)

The reader believes Scenario #2 is most likely. The reader says he/she would not be surprised if Russia is the instigator of a major cut. $70 to $90 oil would revitalize Russia's oil and gas programs. They might choose to keep prices from going too high, in the short-term, to just marginally meet OPEC budget needs. This would likely postpone Arab plans to build major gas lines to Europe and compete with Russia who has a large share of this market, especially in the Central and Eastern Europe.