This Price Pause Proves Who the Oil Puppet Master Really Is

This Price Pause Proves Who the Oil Puppet Master Really Is

by | published May 30th, 2018

A week ago, the market as a whole was marveling as oil prices surged to their highest levels in nearly four years on the back of geopolitical tension and record-breaking shale production in the U.S.

And while it is true that oil flowing from the shale fields at a record pace, driving U.S. output to roughly double in a decade, coupled with rising tensions around the world, has helped support prices as they march higher, there is another force that is still pulling the strings of the market.

You see, a few simple words from the “Oil King” last week and head-spinning price swings are back with a vengeance once again.

In fact, I can prove that this oil-rich kingdom holds more pricing power than the hundreds of shale companies spread from Texas to North Dakota combined.

Let’s take a look…

The King Has Returned

When Saudi Arabia hinted that OPEC and Russia would pump move volume into the market “in the near future” on Friday, the market panicked.

Crude crashed more than 8% in the span of just a few days – a dramatic sell-off that wiped out a chunk of WTI (West Texas Intermediate) and Brent’s recent gains.

“Two years ago, we pulled supply. I think in the near future there will be time to release supply,” Saudi energy minister Khalid Al-Falih said. “It’s likely that it will happen in the second half of this year. We’ve had intensive discussions [with Russian energy Minister Alexander Novak], and I think we’re aligned on that,” the Saudi official added. “Whether it’s a million barrels [or] more or less, we think we’ll have to wait until June before making that announcement,” he said.

Saudi Arabia has earned its clout from its abundance of spare capacity. The oil-rich nation is capable of producing nearly 12 million barrels a day if it wanted to.

[BREAKING] See Why Saudi Arabia’s Dumping $300 Million into This Mega Power Provider

And it’s the nations unique ability to open or close the tap at will that gives Riyadh the ability to influence oil prices more than any other producer in the world – including the U.S.

“Several years ago everybody who loved the ‘Shale is Superman’ story would have said we’re never going to be in that situation again-we’re never going to have to go to the Saudis with an oil ask,” said Helima Croft, global head of commodity strategy at RBC Capital Markets. “Yet here we are.”

Since the 1970s, the U.S. has leaned on Saudi Arabia, attempting to sweet-talk the oil-rich nation into using its influence to stabilize prices.

Former U.S. Energy Secretary Bill Richardson said he used to travel all over the world to try to sway then Saudi Oil Minister Ali al-Naimi to balance the market. In fact, he admitted to lobbying oil ministers for a production increase after prices more than doubled in a year in 2000.

Back then, Mr. Naimi was the “benevolent dictator” of the oil market. “The Saudis controlled OPEC, and they controlled oil prices,” he said in an interview.

Fact is, Saudi Arabia’s status as the world’s swing producer – and the de facto leader of OPEC – gives it an oversized role within the global economy.

By curbing supply, the Kingdom can…

  • Boost prices at the pump;
  • Stoke inflation internationally; and
  • Cause transportation costs to skyrocket.

Or it can offer pricing relief by unleashing more crude into the market, as we saw with its potential deal with Russia.

MbS Walks on the Wild Side

For decades, Saudi Arabia was the oil-price dove within OPEC, pushing back against members like Venezuela and Iran who were gunning for higher crude prices.

A role that has rapidly been changing over the past few years.

This de facto OPEC leader is facing an unprecedented amount of pressure as Crown Prince Mohammed Bin Salman (MbS) continues to implement sweeping economic reforms under his “Vision 2030” plan, which includes the potentially record-breaking IPO of its state oil company.

“They are definitely not a price dove anymore,” said Mike Wittner, head of oil market research at Societe Generale. “They have to think about their social costs, about Vision 2030, about the Saudi Aramco partial IPO or private placement.”

“If you’re Mohammed Bin Salman, and trying to radically reinvent your country” then “you need a certain price to make it work,” said Helima Croft, head of commodity strategy at RBC Capital Markets.

For Saudi Arabia, that price is $100 or more if MbS wants to keep his nation afloat.

The Saudis are seeking “a bridge price, to get you where you’re comfortable with deeper reform,” said Croft. “If you’re willing to start a revolution in your country, and shake it to its core, is an oil price of $27 really where you want to be?”

Aramco’s Place in the Saudi “Circle of Life”

For the better part of five years, the Saudi government has been in a downward spiral.

They’ve had to declare record-breaking deficits, unprecedented tax increases, and for the first time since 2007, the Saudi government has been forced to draw on its foreign reserves and issue bonds.

As the Saudi government spends increasingly more money especially on defense for its war in Yemen and supporting rebels in Syria, the world’s second-largest oil producer is hemorrhaging cash faster than they can make it.

That’s the real motivation behind the upcoming Aramco IPO.

The Kingdom is hoping the capital it’s able to garner from the IPO will be the windfall game-changer it needs to survive past its centennial anniversary.

Based on my estimation, the Saudi Aramco IPO will make approximately a million dollars for every single dollar the price of oil goes up.

That’s why I know, with almost utmost certainty, that we haven’t seen the end of Saudi Arabia’s influence on prices.

This oil-rich nation has had one mission, and one mission only, for the past few years – push oil to $100 or higher.

That’s why I’m not sweating the recent price volatility or any rumors (even if they do come to pass) about opening the tap and pumping more oil into the market in 2018.

It’s nothing more than a blip on the radar.

And reading too much into it could spell disaster for your financial well-being.

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Longtime Oil & Energy Investors have heard me say this countless times, but it bears repeating now.

Regardless of what mayhem is playing tug-of-war with prices, don’t fall prey to your fears and pull out of the market.

It’s one of the single-most disastrous mistakes you can make in investing right now.

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