OpEd: Oil producers gambling on price shifts and prudence

(FinancialPress) — Gambling is an interesting study of the mathematics of determining chance and the study of human psychology.

The drama of self-preservation unfolding in front of us— as we watch a group act reflexively to provide for their own people and at least protect their status quo.

We are today watching Saudi Arabia’s attempts to manipulate oil prices.  Saudi desires to keep their position as the “Swing Producer” of oil ,while keeping domestic issues in check.

A tough, tough job indeed.

All of this while trying to divest of a small share of ownership in state-owned Aramco  to keep social programs alive, and ultimately stem civil unrest.

This effort is running against a push by U.S. companies compelled to drill more wells in the tight shale plays in the States, all while driving other producers to cheat on their agreed production restraint.

OPEC and an assortment of non-OPEC producers are doing the same thing to the delight of consumer countries.

Keep prices low enough to keep their domestic needs fulfilled and not lose market share while fighting increased production by their competitors.

Agree to cut backs, but you can buy cheaper oil if you cannot upset their partners in OPEC or the coalition.

All of the producing countries are attending this dance in their own way.

It’s like herding cats.

As the article written by Joe Gemino in Morningstar this morning points out (see http://news.morningstar.com/articlenet/article.aspx?id=826337&SR=Yahoo&yptr=yahoo).

There’s a significant reason to bet that pricing won’t stabilize at the magic $60/barrel—A number floated as pilotable in issuing the IPO for Aramco.

Can the threat by Saudi to pull out of OPEC bring the other producers back in line enough to offset the Shale Oil frenzy from impacting supply?  Is this going to put upward pressure to hit that magic number?  Both are necessary questions.

China, an oil-producing country albeit minor, may well be the one to watch.  They have been busy shoring up their supply needs from strategic purchases such as buying stored oil in South Africa (see https://www.bloomberg.com/news/articles/2017-09-20/oil-traders-empty-key-crude-storage-hub-as-global-demand-booms ) or the import of more oil from Siberia (see https://www.reuters.com/article/us-china-silkroad-russia-pipelines/china-to-complete-russia-oil-gas-pipeline-sections-by-end-2018-vice-governor-idUSKBN18819I ).  Siberian volumes will start hitting the planned numbers late next year.

Mathematically the chances of hitting $60/barrel and maintaining will be challenging.

The wildcard will always be the impact of weather, or other events, that interrupt the supply chain. To my knowledge the prediction of weather is not very accurate nor the events in the Middle East.  That being said it has been fun to watch.

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