OIL: SAUDI ARABIA’S PR COUP

The OPEC meeting was exactly what the Saudis wanted: no agreement, no real increase in supply and no harm on Saudi Arabia’s reputation as friend on the West. The reality is that the Saudis masterly orchestrated the script and the show to achieve their ultimate goal: higher oil prices without a public relation backlash.

Here is how most of the world sees things today based from accounts from the WSJ and the FT::

An acrimonious OPEC meeting failed to produce an agreement to increase oil production despite tight supplies and rising prices, bringing to the fore long-simmering divisions between key cartel players Saudi Arabia and Iran and calling into question the group’s ability to influence oil prices.

A group led by Saudi Arabia pushed hard for an actual increase in oil production of 1.5 million barrels a day, which would have brought OPEC’s total production to 30.3 million barrels a day, roughly a third of world supplies.

But the Saudi group was blocked by six members, including Iran, who argued that demand for oil will remain soft due to weaknesses in the U.S. economy and other factors.

OPEC talks broke down in acrimony, underlying concerns about the group’s willingness to help control prices. Saudi Arabia pledged unilaterally to ensure plentiful supplies, helping cap gains in Brent.

Great show, the Saudis tried hard to save us all, but evil Iran screwed us.

In my May 9 post (SLICKLY SAUDIS, STICKY PRICES) I showed that the Saudis’ actions have been the opposite of their rhetoric during the last 10 years and concluded that

Opec, particularly the Saudis, are not the friends they claim they are. They are not willing/capable to raise production and are totally content to let prices rise in a relatively orderly fashion.

Why?

There is little coincidence in the fact that Saudi Arabia has needed ever increasing oil revenues to balance its budgets and rising world oil prices. Ten years ago, Saudi Arabia was able to balance its budget with oil prices in the low $20s. The Institute of International Finance now estimates that the Kingdom required $68 in 2010 and $88 this year and will need $110 in 2015.

Higher oil revenue will be needed to pay for the packages of social spending totaling $129bn (50% of SA’s oil revenues in 2010) aimed at averting the spread of dissent that toppled several MENA leaders. Other Opec nations have announced increased spending to appease their people and avert even more significant geopolitical changes in the region.

here’s what really happened as Dennis Gartman describes it:

What really happened is demonstrably at variance with what on the surface appears to have happened, and it actually happened over this past weekend when Saudi Arabia released its pricing formula for July. Without getting too academic on everyone, the Saudis cut the discount the have been offering on Saudi Arab Heavy crude [Ed. Note: (…)Saudi Arab Heavy
crude has a sulfur content of approximately 2.8% and an API near 26. It is an unwanted and un-bid for crude oil these days, and the Saudi’s know that all too well.]. No one wants that crude anyway, and now the Saudis have taken their crude quietly off the market by cutting the discount usually offered while offering large amounts of crude that no one really wants. Unless the prices are changed OPEC production will go down even if more oil is offered.

When the announcement on the discontinued discount pricing by the Saudis was announced over the weekend we talked, via e-mail, with our old friend, Dr. Philip Verleger, whose knowledge of the oil industry is, in our
opinion, second to none. (…) This decision, we thought, coming only a few days before the OPEC meeting… which by then we knew would be rancorous and would end in an “ugly” fashion… meant that the Saudis were moving in rather unusual ways and were about to do something that would be detrimental to the world’s oil consumers without doing damage to their own global stature. (…)Dr. Verleger: “Saudi Arabia has just pulled off one of the most remarkable public relations operations in many years. Last Sunday Saudi Aramco announced it was reducing the discount
offered for its medium and heavy grades of crudes. The reductions in the discounts will make Saudi crude oil less profitable to refine and should, other things being equal, lead to a reduction in purchases of Saudi crude.
The cuts will, however, likely boost Saudi revenue – the goal of every profit maximizing entrepreneur. (…) energy policy officials in consuming countries will back off from their threats to release strategic stocks.
In the mean time, the firms that buy and refine crude oil are left holding the bag. Their losses will mount if they buy more crude. On the other hand they will be attacked by politicians across the globe if they do not buy oil and build inventories for the later part of 2011.”

Gartman concludes:

You have to stand back in awe and admire the sheer brilliance of the chess
move. Check and check mate! Oh, and prices are heading materially higher even from here.

As a result, oil prices are unlikely to weaken measurably along with world economies. In fact, high oil prices will exacerbate the slowdown.

 

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