Based on the e-mail notes and comments sent, it sounds like most saw this story on CNBC or read it on the internet: Prince says Saudi will not let oil rise above $100/bbl, when the discussion regarding the Iranians closing the strait came up.
Two points: first, in the very recent past, WTI spot price was above $100/bbl (on January 4, 2012, the high for WTI was $103.90) -- just barely, but technically ...
Second, when did Saudi start pricing their oil against the WTI price? It's my understanding that the price of Saudi oil correlates closely with Brent, not WTI. Brent, of course, is well above $100, today about $116.
So, Saudi oil, Brent or WTI? Who's on first, what's on second? The prince also said the entire Middle East needs to be nuclear free, stating that Israel needs to give up its nuclear weapons also (Israel, by the way, has never said it has a nuclear program). Like that's going to happen.
Beyond quibbling over who's on first, what's on second, the whole interview lacked credibility. In January, 2012, Saudi Arabia set the price target for oil at $100 (again, WTI, Brent?), implying that was the floor. So, if that's the floor, and today's prince says the ceiling is $100, that's not much of a spread. Zero, in fact.
Further, we've been through this exercise before. During the recent Libyan conflict when somewhere between one-half million bbls of Libyan oil and 2 million bbls were taken off the market, Saudi said it would make up the difference. Many of us opined that Saudi can't easily make up the difference, and, in fact, there is little evidence that Saudi increased production significantly during the Libyan conflict.
Besides, the whole discussion was idle rambling: the Iranians are not going to shut the strait. I was going to update the poll with a new question, but it appears it may be relevant for a few more weeks.
I take the prince's comments with a grain of salt. Or perhaps with a drop of oil.
You are overanalyzing OPEC strategy.
ReplyDeleteSimply stated, the strategy is to maximize oil revenue while not putting the price so high that oil imports become a cause of recession in the importing nations. Executing the strategy requires saudis to assess economic and geopolitical dynamics from time to time and come to a price target which they then "enforce" by adding (to keep price from going to high and causing recession during growth in import nations) or withholding (to max profits during growth when import nations are not in danger of recession). Saudi biggest fear is recession because then an oversupply condition occurs and ability to set price by control of supply is deminished or even non existent (see 08 recession).
The obvious problem is that there are so many world economic and political moving parts that no one can control much of what ultimately happens or when.
For OPEC though, the strategy has worked enough to have greatly improved their quality of life over the years over what it would have otherwise been. This wealth transfer had come at the expense of the importing nations.
That's the first time I've been accused of over-analyzing something. Smile.
DeleteMy analyses of almost anything are pretty superficial. As noted, most of my commentaries are at the level one would find among friends at the Williston Economart.
I agree with you in general. The only thing you left out was whether Saudi has the ability to increase production to any significant extent if necessary. I'm in the camp that says they can't. I believe that's a minority opinion but one that is gaining adherents.
Thank you for taking time to comment.
Saudi statements on oil prices should not be interpreted literally.
ReplyDeleteThe question is, "why did they say that?"
Today, the answer might be Iran. Politics.
Not about the price of oil. About convincing people about the price.
Probably.
anon 1
Thank you, thank you, thank you.
DeleteI did miss the point. This interview was not about price -- like you say, it was about something else.
This interview was all about letting Iran know that shutting the strait was not a very wise thing to do. Neither the US nor Mideast nations would look kindly toward Iran if they did this.
And, of course, he wanted to reassure the world that Saudi was not looking to cause another recession by letting price of oil rise.
You said this much better than I.
Hey, having said that, one could argue that the Prince was saying he has no problem with $100 oil, which is much higher than the $75 that the talking heads at CNBC suggest. So, for the bulls this could be interpreted as very, very reassuring.
Thanks for taking time to comment.
There is no upside for Saudi to overstate ability to increase. None. There is only downside.
ReplyDeleteThink about it. Saudi says to europe go ahead and stop buying Iran oil and we the Saudis will make up the difference (knowing all along that they can't). Based on saudi commitment, Europe says no to Iran oil then asks Saudi to supply. Saudi says kings x we were just kidding. At that point world oil price would increase to say the least as Europe scrambled for a source. And this does not even consider a supply interruption in the strait . There is some limit to how much spare capacity Saudi has, how much lead time is needed to come up and for how long they could sustain the added pace, but Saudi has way more to lose by being deceptive even if it would means their true spare capacity is less than believed.
I remember this same comment when we had this discussion during the Libyan conflict: the Saudis not being deceptive. Ha.
Delete