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Page added on December 5, 2013
The Saudis Still Hate Iran, Watch for Higher Crude
Saudi Arabia’s oil minister welcomed Iran back to the international market pending the removal of sanctions next year. At a rollicking OPEC meeting Saudi Arabian officials downplayed the risk of excess supply driving down prices, suggesting the nation will continue to produce at maximum capacity regardless of price. For its part Iran said it’s all but ready to start cranking out four million barrels of oil a day and other producers are simply going to have to cut production if they want to support prices.
The easiest way to reconcile the conflicting messages is to assume any agreement between the Saudis and Iran was unmitigated nonsense according to Dan Dicker of oilprice.com and author of Oil’s Endless Bid.
“The sounds that the Saudis are making about being so happy to see the Iranians back in the international community is a bunch of PR nonesense,” Dicker scoffs in the attached clip. Making the observation that the only thing weirder than Saudi Arabia and Iran making nice is that Israel is in on the deal, Dicker suggests Saudi Arabia is likely to attempt to manipulate both oil prices and US international policy by ratcheting back production. Saudi antipathy towards the Iranians is such that they have to do something and restricting production is the only available leverage.
When the deal was announced the knee jerk reaction was to trust the Saudi’s commitment to unrestrained production and sell Brent crude. Once traders had a moment to reflect, prices started rallying and haven’t stopped since.
“All of the geopolitical risks remain strongly in place and all the risks therefore to the oil market remain strongly to the upside,” Dicker says.
What impact will OPEC’s ongoing unrest have on the US and its benchmark WTI crude? Stay tuned for part 2 of Breakout’s conversation with Dan Dicker.
7 Comments on "The Saudis Still Hate Iran, Watch for Higher Crude"
rockman on Thu, 5th Dec 2013 5:12 pm
I’m not predicting what the KSA will or won’t do regarding production volumes. But it’s good to remember that they were pulling in about $60 billion per year from oil sales not that long ago. Lately that number is over $300 billion per year. They could easily cut production to maintain high oil prices and still receive a much larger income than they were just 6 or 8 years ago. And at the same time keeping more of their oil in the ground for future sale as well as internal consumption.
Northwest Resident on Thu, 5th Dec 2013 6:57 pm
rockman — if KSA can do that (sell less, make more), then it would be illogical for them not to do so, wouldn’t it? Unless, of course, there were other hidden factors involved (and there probably are).
tahoe1780 on Thu, 5th Dec 2013 7:40 pm
Hasn’t much of that $300 billion gone to keeping the unemployed “princes” appeased? http://www.reuters.com/article/2012/12/29/saudi-budget-idUSL5E8NT17K20121229
Wouldn’t these social programs, combined with increasing internal consumption http://www.dailystar.com.lb/Opinion/Commentary/2013/Jun-10/219845-the-risks-of-saudi-oil-consumption.ashx#axzz2mdAfmX5D limit their ability to voluntarily reduce exports further?
sparky on Fri, 6th Dec 2013 3:31 am
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So far , that’s a good call
the OPEC basket price AKA the Saudi price has been on a step rise since the deal was sealed.
http://www.opec.org/opec_web/en/data_graphs/40.htm
I guess the best explanation is severe cut in production ,just to send a message
rockman on Fri, 6th Dec 2013 12:41 pm
Tahoe – yes but it cuts both ways. They had been keeping the natives happy with $60 billion/yr just 10 years ago. If the cut production and reduced income from $300 billion/yr to $250 billion/yr I suspect they can still keep them happy. But consider what happens if they don’t cut production, the market gets oversupplied with oil, prices drop and the KSA revenue drops to $250 billion/yr even at the higher production rate. They’ll still be making the same income but depleting their reserves fast. Given such circumstances what would you do?
NWR – Probably the biggest addition factor would be long term supply contract commitments especially with their new BFF…China.
shortonoil on Fri, 6th Dec 2013 5:16 pm
The Saudis are as happy to have the Iranians back in the oil business as Farmer Brown was to find a weasel in his chicken coup. Of course the Saudis will cut production to force prices higher. The did it before, and they’ll do it again.
http://www.eia.gov/countries/country-data.cfm?fips=sa#pet
click +expand all, click Total Oil Production graph for full page
Between 1980 and 1985 they cut production by almost 50% to force prices higher. Other OPEC members also participated in the attempt. Prices rose 292%, and was more than 3 stdev from the curve for the six years period. At that time Russia still had the capacity to make up most of the difference; OPEC eventually gave up the attempt. If it happens this time, the sick old Russian bear is not going to be there as a counter weight to Saudi oil dominance.
http://www.lukoil.com/materials/doc/DataBook/DBP/2011/part_03.pdf
shortonoil on Fri, 6th Dec 2013 5:25 pm
PS
Note the water cut in many of Lukoil’s fields!