If you slept in on Daylight Savings Time, then you may have missed that we have another war erupting in the Middle East — Saudi Arabia (through the newly public Aramco which it controls) has lowered the price of its crude, while threatening to increase crude oil production by more than 2,300,000 barrels daily to a total of 12MM barrels per day.
This is a hissy fit on the heels of an unsuccessful OPEC + meeting (the plus being the addition of Russia) attempt to reduce production by 1.5MM barrels.
As always when this group meets, there was a lot of discussion, but no consensus.
The current Organization of Petroleum Exporting Countries member nations are Algeria, Angola, Congo, Ecuador, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Saudi Arabia, United Arab Emirates, and Venezuela. As you can see, Saudi Arabia is positioned to be the leader of this bunch.
When you add Egypt and Syria, you have the Organization of Arab Petroleum Exporting Countries. This group imposed oil embargoes against the United States and any allies who supported Israel during the Six-Day War (1967) and the Yom Kippur War (1973).
At the time of the Yom Kippur War the result was that crude went from $3/barrel to $12/barrel which resulted in emergency rationing. There was widespread panic, declining US oil production (which is totally lost on me), currency devaluations, and a strike by the United Kingdom coal miners who saw an opportunity in the chaos.
The UK imposed a 3-day work week as an emergency measure while European countries banned non-essential Sunday driving.
This action is generally attributed with being the end of the post-WWII economic expansion, and the trigger for a global economic recession that created surging inflation and unemployment, stock/bond market declines, major shifts in global trade patterns and a greater focus on petro balance of trade and the flow of petro dollars.
I tell you this because in the institutional memory of OPEC this is what they have done in the past. It was a BFD.
Formerly, Indonesia and Qatar were members, but no longer. Qatar left in January 2019 amid an announcement that it was going to focus on natural gas production. Indonesia is an off-again, on-again member like a petulant bride.
[Note: This is a perfect example of the importance of American energy independence: disconnection from the Middle East chaos, inoculation from the energy control of OPEC, the current shrinking importance of what happens in the Straits of Hormuz, and the buffer between Middle Eastern oil economics and the drums of war. Thanks, Trump.]
So what is Saudi Arabia going to do and when, Big Red Car?
Saudi Arabia is going to dramatically increase production and lower its prices.
Saudi Arabia will increase production by 2.3MM barrels a day on a base of 9.7MM barrels.
Saudi Arabia will lower its April 2020 pricing to Asia by $4-6/barrel; to the United States by $7/barrel, and to Europe by $8/barrel.
This puts Saudi Arabian oil below the benchmark Brent crude.
The magnitude of the lowered price to Europe puts Russian crude in the cross hairs.
The Kingdom will immediately increase production to 10MM barrels/day and then to 12MM. The increase to 12MM barrels is a poorly kept secret.
This is what an economic war trigger looks like. Study it.
What’s going to happen, Big Red Car?
A few very definitive things are going to happen:
1. The market price of crude oil is going down. Big league.
2. The resultant refined product price for gasoline will also go down. [Anecdotally, the cheapest price for gasoline in Austin By God Texas went down $0.05/gallon in the last two days to $1.80/gallon. It is going lower by tomorrow. Trust me on this one.]
3. This is going to give a shot in the arm to any business that has gasoline as an element of its “cost of goods sold.” Talking to you trucking companies.
4. Normally, I would also say that this would spark more travel in the USA, but with the Wutang Flu, not so much. The airlines have a different problem.
5. Oil stocks are going to be dicey, but dividends — which may be in risk of inadequate coverage — may be a play.
What else, Big Red Car?
Here are some other considerations:
1. Troubled countries — talking to you Venezuela, Iran, Russia — are going to feel the pain of reduced cash flow. [I like that.]
2. There is a lot of production — Venezuela, Iran — that is struggling to get to market because of American sanctions. This will become an area of increased pain.
3. The demand for oil is going to go down due to the Wutang Flu. Planes are not flying. Cruise ships are not sailing. People are not traveling. All of this results in decreased demand.
Have we seen this movie before, Big Red Car?
Yes, dear reader, we have. It was back in November 2014 when the Saudis threw a similar such hissy fit when provoked by OPEC behavior and the advent of shale oil in the US.
Oil got as low as $25/barrel in late 2015 — early 2016.
Thereafter, it continues to rise until the end of 2018 when the market drove prices down.
Bottom line it, Big Red Car
The price of gasoline in the US could drop below $1.50/gallon. Maybe as low as $1.25 because of the triple witching of heightened production, lower initial prices, and the impact of the Wutang Flu. It could be a magical combo or a deadly combo, depending where you sit.
The price of oil could drop to $25/barrel in the world.
There will be big losers. There will be big winners.
This will last for a year, no more.
What is interesting to me is that, apparently, nobody saw this coming. I also think that the Kingdom of Saudi Arabia has some internal strife that is being thrown into the mix with allegations of a nascent coup against the actual ruler MBS — Mohammad bin Salman bin Abdulaziz Al Saud.
But, hey, what the Hell do I really know anyway? I’m just a Big Red Car and I run on regular gasoline and Senior Citizen high mileage 10W50 oil. 