Commodities | Jun 28 2011
GaveKal offered the following observations: The International Energy Agency (IEA) took the market by surprise and announced the release of 60mn barrels from strategic petroleum reserves, around half of which will come from the US. This is only the third time IEA member countries have used reserves in this way. Precedents include 2005 (when Hurricane Katrina damaged offshore oil rigs, pipelines and refineries in the Gulf of Mexico), and 1990 (following Iraq's invasion of Kuwait). So why now when oil prices were already heading south?
The answer may have a lot to do with geopolitics and the recent breakdown of the OPEC summit. At this juncture, one has to wonder whether Western nations and the Saudis have now agreed to do what they can to drive oil prices lower and ensure that, at the very least, oil does not end up being the cause of a new OECD recession. Pushing back the oil price towards US$80/bbl may have the following attractions for the Saudis:
1) It would teach Iran and Venezuela a lesson about non-cooperation within OPEC.
2) It would weaken the Iranian government at a time when President Ahmadinejad is already facing major pressures internally. And, of course, following Iran's support of the insurgency in Bahrain, there is even less love lost between the Saudis and Iranians than usual.
3) It would curry favour with the US and might help establish a new sense of mutual cooperation between the Saudi royals and the Obama Administration (after Obama shocked the Saudis by abandoning Egyptian President Mubarak).
4) A much lower oil price ($80/bbl or less) would undermine the economics of energy alternatives and electric vehicles, which might be starting to worry the Saudis (e.g., China is now deploying very significant resources in the field of alternatives).
Up until recently, the main constraints that seemed to prevent the Saudis from driving down the oil price were
a) their desire to keep up a semblance of cooperation within OPEC, and
b) a likely seething anger at the Obama administration for abandoning Mubarak.
But assuming that this anger has been calmed by the US' quietness over Bahrain, and the NATO strikes against Qadaffi (no Saudi friend), the Saudis (plus Abu Dhabi and Kuwait) may yet see the recent breakdown of OPEC talks as an opportunity to teach OPEC's less pliant nations a lesson. And this is before going into the growing threat to Saudi Arabia of a nuclear Iran, etc.
In short, while we understand that Saudi needs oil to be above US$85/bbl to balance its (fast-rising) budget, the Saudi princes may well have decided that Iran needs high oil prices a lot more than Saudi does. And at this juncture, a weaker President Ahmadinejad, and a stronger growth momentum in the OECD, may suit Saudi interests just fine.
The above expressed views are GaveKal's, not FNArena's (see our disclaimer). All copyright GaveKal.
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