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Stewart Dalby: Will Saudis end price war with US frackers?

Stewart Dalby: Will Saudis end price war with US frackers?
It has been a war of attrition, but have the Saudis proved a point?

How is the price war that Saudi Arabia, the leading light of the Organisation of Petroleum Exporting Countries (OPEC), is waging against US frackers going? Last year the Saudis started to flood the world market with surplus oil to protect its market share.

I found two recent articles with opposing views on the oil price subject and both are pretty convincing.

A piece entitled, Saudis Are Winning the War on Shale, by BloombergView columnist Leonid Bershidsky, said: “If you believe all the recent stories on how Saudi Arabia is losing price war it started against US tight oil producers last year, the new Oil Market Report from the International Energy Agency (IEA) offers a reality check. The Saudis are winning, though they're paying a heavy price for it.”

Another recent article in the Daily Telegraph takes a different view. In a well sourced piece, Ambrose Evans Pritchard said that OPEC group of countries cannot withstand the pain of low crude prices indefinitely.

In fact, it may be forced to abandon its pugnacious bid for market share within months, according to Russia’s chief energy official.

Arkady Dvorkovich, who is also deputy prime minister said: “I don’t think they really want to live with low oil prices for a long time. At some point it is likely they are going to have to change policy. They can last a few months to a couple of years”.

Saudi Arabia rejected a recent call from Venezuela for a summit meeting to discuss the oil price. This suggests the Saudis are not ready to throw in the towel just yet. But nobody really knows except the Saudis and they are not really saying.

So where do we go from here? I did a little straw poll of my own amongst oilmen and women at the recent inaugural Oil Capital conference in London and elsewhere.

I spoke to 11 people and the broad consensus was that there would be pain for two to three years by which time the Saudis would have ceased hostilities and supply and demand would come back roughly into line and the price would reach US$70 a barrel.

But broker Westhouse in its latest bulletin rather dismisses this consensus view. It says: “We believe that oil prices continue to be driven more by sentiment than by facts. Many suggest that the industry is facing an outlook that is worse than 1985/86.

“The reality is that there is little spare capacity in OPEC (there was c.10mln barrels of spare capacity in 1985), demand is not falling catastrophically (it fell over 6mln barrels between 1979 and 1984).

“We maintain that the supposed global oil supply glut could dissipate much quicker than market consensus believes.”

I have always thought it is a mug’s game predicting the oil price. But I tend to agree with Westhouse that the oil price will recover much more quickly than the market consensus believes, but for a different reason.

I vividly remember going through the 2008 and 2009 oil price collapse and recovery. The oil price peaked at US$147 a barrel in July 2008 and collapsed to under US$40 a barrel by February 2009 before climbing back to over US$75 a barrel in the following seven months.

George Soros the international financier said at the time that he reckoned  75% of the oil price is due to dealers - - hedge funds and the like. There have been lots of bear operations in recent months. Once the funds feel the floor has been reached (and that should be soon) they could start buying forward again. This could be as influential on the oil price as supply and demand fundamentals.    

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