Locator: 44295B.
Updates
April 4, 2023: for OPEC, the time was right to move the markets, experts say. Hart Energy.
April 4, 2023: A reader sent me this earlier this morning:
Excellent.
That makes a lot of sense.
That was a nice way to state it: triggering event.
Lots and lots of issues but the question I should have asked in my original note (see link above), what was the triggering event or tipping point?
That really, really makes sense. Saudi needed to protect Brent $80-floor at all costs and when SecEnergy Jennifer "no clue" Granholm said she wouldn't refill the SPR this year, and, in fact, she said, it would take years to refill -- the Saudis must have gone ballistic. Especially coming from "no clue" SecEnergy.
I remember the day when Granholm said the volume of the SPR was measured in bbls of oil per day (bopd). Wow. LOL.
Again, thank you for that note.
Later, 11:12 p.m. CT: a reader opines.
Later, 10:59 p.m. CT: Janet Yellen says the "surprise cut" is "an unconstructive act."
- was it constructive when President Biden said very, very clearly: "no more drilling"?
- was
it constructive when President Biden does everything he can to shut
down US oil sector and then ask the Saudis to increase their own
production?
- was it an construcctive when Biden precipitously and prejudiciously killed the Keystone XL pipeline on his first day in office?
- was is constructive when President Biden said "no" to COP's 5-well drilling program in the Willow Project?
- was it constructive to release record amounts of oil from the for purely political reasons?
- was it constructive to gaslight Americans when he said the administration would start refilling the SPR this year?
- the list goes on.
Later, 5:10 p.m. CT: some argue the “surprise cut” was directed against “short sellers.” That would certainly go a long way to explain this action by OPEC.
Original Post
Perhaps the most interesting "energy question" this month: why the surprise OPEC cut? The Arab culture, much like the Chinese, tend to move slowly, cautiously, wanting no surprises.
But the OPEC cut was a complete surprise. The "cut" doesn't even seem to have been coordinated. Almost as if there was some back-room, back-channel decision making. Obviously it had to have had the approval of the Saudi prince-heir apparent.
It certainly was not in the best interest of the Chinese, with whom the Saudis have been growing closer.
It will be interesting:
- to see the op-eds that come out on this story; and,
- the unintended consequences.
The big question, in hindsight, how did no one see this coming. Did anyone see any op-ed pieces suggesting that Saudi Arabia was likely to cut prices? If so, I certainly didn't see them. There were plenty of articles and tweets of just the opposite: that by driving season this summer, US demand for crude oil would exceed supply. This "cut" -- based on those analyses -- suggests that OPEC is thinking just the opposite.
The one unintended consequence I am most interested in is how quickly US shale operators can take advantage of this "surprise." Most analysts, it seems, suggest that US shale operators cannot respond like they did in the original Bakken boom, 2007 to 2014. I'm not in that camp. I think we will be surprised, but it might take a year just because the oil companies have drawn down so much since the pandemic.
The second issue is the price of gasoline, and if it increases significantly, how the Biden administration responds. As we know, the Biden policy is definitely "no more drilling."
The third issue, of course, is what happens in California. It seems it will be easy for Governor Newsom to suggest that US oil companies will take advantage of this "surprise," raise prices at the pump, and gouge the California driver. It might be difficult for the average Californian to accept that when they actually know what's going on.
The fourth issue, what will the Fed do? Will the sudden change affect JPow's actions and/or words?
So, the first bit of analysis, superficial as it is:
I don't think the decision to cut production was "anger-driven." Even if directed against short sellers, that doesn’t mean it was driven by “anger.”
I think it has more to do with the concern about a global recession, driving down oil demand, and driving down prices. Some have already said this "surprise cut" was to save $80-Brent at all costs. Saudi Arabia would want to get ahead of that. For Saudi Arabia it's a win-win. If there is no global recession, nothing has been lost by cutting production; and, if there is a global recession, they will have been smart to get out in front.
The "surprise cut" does seem to give Russia some breathing room. I don't see how the "surprise cut" has hurt Russia's position. It's very possible Russia and Saudi Arabia coordinated on this from the very beginning, some weeks ago.
And as stated above, it certainly was not in the best interest of the Chinese, with whom the Saudis have been growing closer.
