Will the Saudis Break Ranks with OPEC? And Will It Matter to Oil Pricing?

OPEC's recent decision to cut production may not have the impact that is usually expected (see NY Times article). Reports are, that Saudi Arabian officials have assured world markets that they would ignore their own cartel members and continue to pump oil.

While agreeing with the recent decision of OPEC to cut production, the Saudis are concerned that higher oil prices will not help the world economy, possibly causing a recession that would not only cause oil prices to collapse even further, but also speed-up the development of alternative energy sources. The 13 nations in OPEC control roughly 40-45 percent of the world's oil production (and hold roughly two-thirds of reserves), yet some large non-OPEC players in the space, such as OECD members and Russia, produce approximately 24 percent and 15 percent, respectively.

The impact of the OPEC decision, especially when one of its members may be breaking ranks, could be less than might be expected, but with close to half of all production their impact is still worth paying attention to. Nonetheless, when an asset is selling-off, even on good (or at least bullish) news, then this also must be noticed.

Oil is nearing the psychological $100 a barrel level once again. If this level is broken with any conviction, even in the face of possible production cuts, this would certainly be an interesting development for the entire market. Further selling pressure seems to be more of a reality at the moment, especially given the de-leveraging of commodity assets by various pension and hedge funds. Then again, as current markets have illustrated on a near daily basis, they have a tendency to change their mind pretty quickly, causing the shorts to also be quite nervous, regardless of their current bias.

It is probably safe to expect continued volatility, but at this point it is not clear whether the recent decision by OPEC can reverse the recent sell-off.

Note: As a follow-up, the Times of London is also reporting that OPEC is continuing to work with Russia on oil production, scheduling another meeting for next month. Together, OPEC and Russia would produce about 50 percent of the world's oil, and could exert more influence when working together.

Note: Hurricane Ike is moving into the Gulf. A number of rigs and platforms are already being affected. Friday price action before the weekend should be interesting. Gasoline prices are jumping on the refinery impacts.

Disclosure: None

Comments

[mangolfer:]

good article. overall trend should continue down next week.

2008 Sep 12 08:34 AM

[JasonC:]

It doesn't matter what quotas they set or what any of them say, they are all cheating like crazy and pumping like mad. Oil is going back to $70, then sideways a little to see if that will hold. Only green luddites in the west can save even that level, and if they are sent packing it is back to $50 or even $30. The bubble, is over.

2008 Sep 12 01:31 PM

[kebu77:]

There is also a political factor at work re Sunni-Shiite tensions in the Middle East. My comments on a related post on yesterday seekingalpha - -

Are the Saudis re-doing 2004? OPEC may 'set' a $100 floor, but it is up to KSA to comply. My guess is they won't because their shot-term political interest is in keeping the party in power. KSA sees the US as a check on a growing Iranian threat. McCain may not intend to stay in Iraq for 100 years, but clearly intends to stay longer than Obama. KSA opposed the US invasion, but once in, they wanted Bush to stay in office in 2004.

So, in spite of OPECs announced intent to reduce production, look for the Saudis to continue its high level of production thru the Nov. election, in its second attempt to decide a US presidential election. (The case can be made that KSA succeeded in 2004 when it produced WAY OVER quota beginning several months before the election and Bush won by a hair - - compare KSA actual production to quota, April-Oct 2004.) This time, they will fail due to the political fundementals (Google: lichtman + 13 keys). Even so, if I was Obama, I'd be pissed for the next 4 to 8 years.

So Kerr, Rubin and other (temporary) bears may find, when the dust settles that the avg. oil price in '08 is closer to $100 than $115. Then, in 2009, geology oil fundementals replace the geopolitical issues and oil starts its march to the Maxwell-Pickens-Simmon... $200 level. Things happen, like KSA lets its wells rest, Iraq fails to settle down, the North Sea and Mexico continue their precipitous declines, the engineers running China continue their massive capital expansion, and 2009 marks the fourth straight year of declining oil exports (Google: "Jeffrey Brown" + "Export Land Model").

More bullish views will return as it, again, separates itself from the herd. "Just my opinion, I could be wrong," but for starters watch the next eight weeks.

2008 Sep 12 03:28 PM