We’re not talking Aussie markets today. If there was ever any doubt, the game of charades at this week’s G20 conference in Brisbane confirmed it — Australia is still a bit-part player on the global stage.
Something far more interesting is brewing in the world of politics and energy. And the story will hit its climax next week in Vienna…
The markets have commodities in a death grip. Iron ore just hit a new five-year low. Coal has slumped. Even gold, which some once viewed as a safe haven, is softening.
And most crucially of all, oil prices are low — and heading lower. Saudi Arabia, the world’s leading oil-producing country, is starting to feel the heat.
The Saudis have spent the past five months cutting the price of oil in markets around the world. This has been their ballsy response to the downward pressure on the crude price from millions of barrels of newly drillable American oil.
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The Saudi strategy has been one of protecting market share at all costs. In their view, if that means lower export earnings, so be it.
For investors, and for Saudi Arabia’s fellow members of the Organisation of the Petroleum Exporting Countries (OPEC), this is uncharted territory.
But the whole game is a calculated bluff. And the players are about to lay their cards on the table…
Gasping under the boot
With crude oil having lost around a third of its value over the past few months, decision time is looming for the Saudis. They need to make a call on whether they ease off on the price cuts, or keep their boot on the neck of the oil market.
From the outside, it looks like the Saudis have a strong hand. Their cost to produce oil is less than US$20 per barrel — so there’s no real downside limit to the pain they could inflict on their fellow oil producers. That’s about as bearish as you can get in the oil market.
The Saudis know how strong their hand looks. That’s why they’ve thrown their weight around the oil market these past few months. They have the muscle to capture more share of a shrinking pie.
But the way we see things shaping up, they’re bluffing out the rest of the OPEC cartel.
Countries like Kuwait and Iran need an oil price well north of current levels for their economies to grow. It’s gotten so bad that the Kuwaitis are freaking out. Over the weekend, the country’s Cabinet and Supreme Petroleum Council held an extraordinary joint meeting to weigh up how to stop the price slide.
According to the official Kuwaiti news agency, the meeting ‘discussed the steps that have to be taken on all levels…including having consultations with fellow OPEC member states for maintaining interests of all parties’.
Kuwait is gasping for breath under the boot of its large southern neighbour. But the way we see it, the Saudis won’t inflict this pain on the oil market and themselves for much longer. And we could see confirmation of that as early as next week.
Austrian climax
On Thursday next week, OPEC’s 166th meeting will kick off in Vienna.
Historically, these jamborees are where the cartel members catch up, smoke cigars, and choke the world’s oil supply to push up prices.
But this meeting will feel different to every previous one. Many OPEC member nations — especially countries like Venezuela, Ecuador and Nigeria — are struggling with prices at rock bottom. They need Saudi Arabia to get reasonable and cut production to support the oil price.
The strong, publicised moves the Saudis have made leading up to this meeting are a bid to make their hand look better to the rest of the cartel. Maybe they want to increase their share of OPEC’s total quota. Maybe they want to control the outcome of next week’s meeting.
In truth, we’re not sure what logic drives the Saudis at this point. But based on how we see this market shaping up — we’re calling their bluff.
Call their bluff
Next week’s meeting in Vienna could mark a bottom for the oil market. Many bargaining chips are on the table — and if Saudi Arabia gives any indication of cutting production to support pricing, the price of crude could shoot up.
The oil market has had every reason in the world to sell off. US shale production has added millions of barrels to global supply. The newly Republican-controlled US Congress may pave the way for US production to ramp up further. And Saudi Arabia has been rattling its sabre on pricing for months now. A ‘perfect storm’ of bearish factors has managed to push the oil price down ‘only’ around 30%.
Any ease-up from the Saudis could see oil recover in a hurry. That’s bad news for Aussie motorists who have been enjoying a few weeks of respite at the pump — but it could be a bullish signal for Australia’s listed oil producers and explorers.
Now is an exciting time for energy stock investors. And if you want the best bang for your buck, speculative oil explorers are the place to be.
Cheers,
Tim Dohrmann,
Editor, Money Morning
The post Call the Saudis’ Bluff and Clean Up on Oil Stocks appeared first on Stock Market News, Finance and Investments | Money Morning Australia.
