28 Mar 2024
Tuesday 28 June 2016 - 15:43
Story Code : 220734

Oil prices rebound after Saudi Arabia crashed the market, but will it last?

After dropping more than 80% in two years, oil prices have started to recover. But a full rebound remains uncertain, stuck at the crossroads of a worldwide recession and the House of Sauds suicide mission to keep pumping more oil.

In February 2016, the oil industry and energy dependent countries panicked asoil prices collapsed froma high of $145 per barrel toa low of $27 per barrel. Market analysts speculated that the collapse inoil prices would cause unrest inoil-rich countries and whiplash investors who had tossed their fortunes intospeculative US shale oil fields.

Since then, oil prices have rebounded considerably. Resting just below $50 per barrel, many hope the catastrophe has been averted. But withmarket turmoil surrounding the recent Brexit referendum potentially sparking a global recession and the Saudi Kingdoms pledge tocontinue flooding the market, many risks remain forthe oil industry.

The best case scenario may be that we are now seeing a new normal, withoil prices hovering between $40 and $60 per barrel forthe foreseeable future asmarket oversupply comes offof the market due toa wave ofbankruptcies inthe US shale industry. Since 2015, over130 US oil and gas companies have filed forbankruptcy, withUS and Canadian oil production sagging byover 2 million barrels per day.

The question remains whether the crash was due toa surge ofnew supplies that came ontothe market duringthe boom time bycountries likethe US and Canada, or if the collapse inprices was part ofan intentional Saudi strategy toforce competitors out.

Did Saudi Arabia Crash the Market Intentionally? Likely.

In 2015, market analysts prepared forthe threat ofa global recession afterChinese economic data showed signs that Beijing may face headwinds inthe coming years. While everybody was preparing fordemand tofall, the Saudi Kingdom made a curious decision toincrease oil production.

Saudi Arabia increased production by2 million barrels ofoil per day, a roughly 20% increase, withthe Crown Prince demanding an additional 20% hike inoil production by2017. Nonetheless, market watchers believed that Saudi Arabia, whose budget is based ona $66.70 per barrel oil price, would back away frompumping oil asprices started tocascade they were wrong.

As energy analyst Marin Katusa explained onRadio Sputnik, Saudi Arabia forced US shale oil properties outof business and proceeded topurchase those same US oil sites forpennies onthe dollar inbankruptcy. The Saudi Kingdom not only ravaged Americas energy renaissance, butalso sought topreserve market share fromIran, no longer hindered byinternational sanctions inthe wake ofthe historic nuclear deal.

On Monday, Loud & Clears Brian Becker sat downwith Ed Hirs, the Managing Director forHillhouse Resources, and Zafar Bangash, author ofthe book "The Doomed Kingdom ofthe House ofSaud," toseparate fact fromfiction onSaudi Arabias role inthe oil price meltdown, and what toexpect next.

Oil Prices Made a Surprise Recovery Since February Will it Last?

"The oil market is followingthe path that OPEC lined outfor it," said Hirs. "If you look back atthe OPEC statements in2015, the ministers said that they would continue producing and let the attrition ofsupply fromhigh cost resources slip away fromthe market and let the ever growing demand set the floor forthe market, atwhich point prices would begin toincrease asthe excess inventory gets worked outof the system."

Hirs explained that although the collapse inoil prices has been devastating formany countries oil-based economies, the market waves have matched very closely withwhat oil analysts expected, withmost experts predicting a rebound towell over $50 per barrel bythe end ofthe year.

Was this a Deliberate Effort bythe Saudis toTarget Rivals?

Hirs said that while it could be argued that Saudi Arabia intentionally undercut the market, a separate line ofthought is that the US shale oil was the last toenter an already crowded market and failed tooffer competitive prices.

In support ofthis secondary line ofthought, he pointed tooil industry models showing that forevery 1% increase inoil supply, prices fall by25%. In his estimate, consistent withprevious reports fromOPEC, the world oil market is oversaturated byroughly 2%, explaining atleast 50% ofthe collapse fromthe high of $145 per barrel.

Zafar Bangash disagreed withthe economists assertions that the phenomenon was solely a matter ofsupply and demand, arguing that Saudi Arabia fabricated the market dislocation inorder topenalize the United States and Iran overthe 2015 nuclear agreement.
"The Saudis were extremely upset and frightened bythe agreement that Iran signed withthe P5+1 countries that led toIran coming onboard withrespect totheir production," he said. "Iran is producing quite a substantial amount ofoil onthe market right now, so the Saudis were trying topunish Iran aswell undercut American shale oil production because they see Iran asnot only a challenger, butalso asan existential threat totheir hegemony inthe Muslim world."


"In addition tothis economic war, there is a political war, and I dont see how the Saudis can win that, and they caused a lot ofeconomic grief forthemselves aswell, withtheir budgets running deficits forthe first time," Bangash added.

"On the one hand they have been able toundermine shale oil considerably, buton the other hand they will continue topay the price both economically and politically."

By Sputnik News
https://theiranproject.com/vdchxvnik23niqd.01t2.html
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