Saudi plays hard-ball on oil prices

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A month ago, with WTI at $70/bbl, the blog suggested that:

“If refiners are forced to cut runs for December, then it would be hard for OPEC to cut its own production quickly enough to compensate. In that case, a $20 – $30/bbl range for crude, albeit temporarily, would not be impossible.”

During November, prices then slipped to $50/bbl. And since OPEC’s failure last weekend to announce any production cuts, WTI has fallen to $40/bbl.

Saudi Arabia clearly played hard-ball at the OPEC meeting. Whilst highlighting their desire for $75/bbl, they did nothing to make it happen. Instead, as the perceptive Petro-Matrix has noted, they were “almost inviting market participants to push prices lower to pressure better OPEC compliance and some non-OPEC participation in the next round of cuts”.

The Saudi position is entirely logical. They knew perfectly well that with oil at $50/bbl, many OPEC members would have signed up for production cutbacks, but then cheated on their quota. Saudi would then have been forced to make up the difference, at a huge cost to its revenue. But now prices have come closer to $30/bbl, compliance should be better. Fear of complete disaster is a great motivator.

Oil markets are not for the faint-hearted. OPEC now needs to make large, credible, cutbacks at their next meeting on 17 December. Otherwise the price fall could easily become self-perpetuating. After all, this week’s $200/t benzene prices imply an oil price of $12/bbl on normal price and cost relationships.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. The aim of this blog is to share ideas about the influences that may shape the chemical industry over the next 12 – 18 months. It will try to look behind today’s headlines, to understand what may happen next in important issues such oil prices, economic growth and the environment. We may also have some fun, investigating a few of the more offbeat events that take place from time to time. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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