Oil Prices and Saudi Arabia

Wrote up some stuff about oil prices earlier, and it’s worth reading if you haven’t already.

Now, if you want to know what happened today with Saudi Arabia announcing production cuts, this CNN article is a good place to start.

But, when you are done reading it, remember a few things:

  1. OPEC companies are known to cheat their production targets, often by a lot. They hope that just saying they are cutting helps boost prices while everyone recounts the actual worldwide inventories.
  2. Russia is not an OPEC country and really has zero economy other than oil, so they tend to produce as much as they possibly can. Higher prices means trying harder.
  3. As the article notes there are a LOT of U.S. oil producers out there that can suck oil from more difficult fields using fracking, but they can’t afford to do it without a certain price, typically in the mid-$60 and up range. But, and here is the rub. Many of those companies are staring at debt payments that they have to make no matter what the price of oil is. The only way to stay cash flow positive is to keep pumping and hope the price turns around. Conversely, they also pump as much as they can, as fast as they can when prices are good.

falling oil prices picture

There is a lot more U.S. oil capacity out there that can still be brought online. Bigger, more stable, oil players don’t fire up their “expensive” fields until they are sure it is worth it. If oil heads back to that $70 range then those fields will start coming online. When that happens, there will be price pressures even with the OPEC / Saudi cut.

Nothing makes OPEC producers cheat more than falling prices AFTER they made a cut. If that happens, expect another big price swoon, especially if it lines up with a seasonal demand drop.

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