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The Saudis Lob A Grenade Into The Elevator. But Don't Assume The Start Of An Era Of Cheap Oil.

What now seems like an eternity ago, Opec announced that it wasn't going to cut oil production to keep the oil price at around $90 a barrel, as much of the global economy teetered on the brink of recession and worse.The oil price has promptly collapsed to below $60 a barrel with some forecasting $40 and below before long.But we forecast that by the end of next year, with hair-raising bumps on the way, it'll be a lot nearer $100 than $40.The real story is that the Saudis see the US shale revolution and the prospect of US energy independence as an 'existential threat.'So with the support of their buddies in the Gulf, Kuwait, Qatar and UAE they got Opec agreement to effectively take the measures needed to kick US shale out of the market and maintain their and Opec's market share: the latter running at 46%.This, more than flaccid global demand lies behind the current depressed oil price.The Saudi strategy is to engineer a sufficient price drop with prospect of more to come to close the credit window for the host of over-levered drillers in the US, who are in hock via junk bonds and loans to the tune of $60-$70 billion, who have to keep drilling to allow for thefact that the typical shale well depletes 80% after a year, and who are relying on an oil price of $70 on average to break even.Provided they can keep the Opec agreement together - a questionable assumption given that Venezuela, Nigeria and Iran for example need an oil price of at least $100 to meet domestic fiscal demands, and that non-Opec members such as, of course, Russia, Norway and Canada don't cut production.At the same time, the supposed surplus of 2m barrels a day may quickly evaporate given that nearly half it was due to a pause in the Libyan civil war. This is no longer on 'pause': Russian production drops off in the winter anyway; and Iraqi production is in any case stretched to the limit in the present circumstances.Noticeable is that there is no longer a geopolitical 'risk premium' in the oil price.Noticeable, too, is that five year oil futures are in the $90 range reflecting the rising costs of oil exploration, despite tech breakthroughs, with supplies of easy, cheap sweet crude fully developed, and potentially shrinking export supplies as oil producers need to use more of their own production for domestic purposes - and that includes Saudi Arabia, always with the Arab Spring in mind, with a young and potentially fractious population, who had to be bought off with massive social spending last time.For now, backed by a war chest of $3 trillion, the Saudis and their Gulf allies will keep up the war against the US shale producers.But given the bedrock realities of the oil market, with huge extra demand by 2020 from China, India, Indonesia, the oil price will revert to mean - $90-$100.Meanwhile, Americans are crowding the auto sales forecourts to buy bigger vehicles while sub-prime funding is available and some alternative energy initiatives are being shelved.There are too many moving parts in this fiendishly complicated story to be definitive over timings.But we are now actively looking for ways to play it and will report back ASAP.It may even be savvy to start buying Russian assets. Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.