Another day, and yet another round of plunging oil prices. If it wasn’t so predictable, you’d be forgiven for thinking it was happening by accident. But there’s nothing coincidental about the volatility taking hold of oil markets.
Supply and demand economics textbooks don’t work here. They’ve haven’t mattered since oil prices began to crash in 2014. That’s because plunging oil prices have little to do with supply and demand. Make no mistake; today’s oil prices are the outcome of a political game of chicken that has no end in sight.
What it’s not is a story about protecting market share interests. Nor does it have much to do with the US shale industry, either. What you’re seeing today are the effects of a determined effort to cripple US opposition. And oil is the instrument through which this strategy is being carried out.
I’ll explain the why and how of all this in a moment; first though, an update on latest developments on oil markets.
Overnight, crude oil fell to its lowest level in 13 years. It dropped below US$27 for the first time since May 2003. So far this year, oil prices are down by 25%.
Meanwhile, Woodside [ASX:WPL] just announced its flagging $1 billion in asset value write-downs on the back of the oil slump. And that’s just Woodside, a big fish in a small pond. Elsewhere, the damage has been even worse with large builds up of oil inventories.
And yet, despite all this, producers continue to flood the market with supply. Why?
The mainstream trots out the same two arguments every time. You’ve heard it all before.
‘Saudi Arabia and OPEC are trying to destroy the US shale oil industry’. And ‘oil producers are boosting supply in order to protect market share’.
Granted, there’s a grain of truth to both of these arguments. But it’s too simplistic to put it down to these factors alone.
As is typically the case, there are many things that motivate oil producers in readjusting policies. With oil such a key component of the global economy, that’s a given. It’s not just economic factors they have to take into account, , but political ones as well. If they can kill two birds with one stone, they will. And that’s exactly what they’re doing here.
Oil economics and politics go together like a house on fire. When something in the market changes, always question ‘why? What reasons might oil producers have in changing their supply strategy? And why would they carry on with a policy that is detrimental to them? It doesn’t make much sense, at least if we subscribe to the official story.
Is the US shale oil industry such a threat to Big Oil that producers have to sacrifice their economies to destroy it? Well, it could be. But considering how much self-inflicted damage they’re causing, that seems unlikely.
If it was this factor alone that was driving current policy, would it really be worth the trouble? Not a chance. Shale oil does not pose an existential threat to oil producers. And it never will. So what are oil exporters playing at?
You’ll never hear the mainstream discuss the real reasons. They’re either oblivious to them, or they’re purposely misleading the public. My betis on the latter, as you can’t trust the media to speak about sensitive international events with complete honesty.
Ultimately, what’s happening in oil markets today is nothing but a grand political chess game. One that’s wicked in nature, and explains the mindless policy better than anything else could, or does.
In this urgent investor report, Daily Reckoning editor Greg Canavan shows you why Australia is poised to fall into its first ‘official’ recession in 25 years…
Simply enter your email address in the box below and click ‘Claim My Free Report’. Plus… you’ll receive a free subscription to The Daily Reckoning.
Oil prices and the Saudi effect
The first thing you must understand is how Saudi Arabia fits into bigger picture. Saudi Arabia has the second largest proven oil reserves in the world, behind Venezuela. As the de facto leader of OPEC, an oil cartel that sets prices, Saudi Arabia holds an influential position in the global oil market. But that doesn’t mean it acts independently in influencing oil prices. Instead, it takes cues from powers that wield real influence over the Saudi’s, like the US.
We’ve seen glimpses of this in the mainstream where the truth has occasionally dripped out. Here’s a quote from a 2015 New York Times article:
‘Saudi Arabia has been trying to pressure President Vladimir Putin of Russia to abandon his support for President Bashar al-Assad of Syria, using its dominance of the global oil markets at a time when the Russian government is reeling from the effects of plummeting oil prices.’
That’s closer to the truth than most of the parroting media will ever broach. But it’s still not quite right. The NYT wrongly assumes Saudi Arabia is pressuring Russia to end their support for al-Assad. We know that’s not true because the Saudi’s don’t really care about Syria. If they wanted to put an end to Russia’s support of Syria, they’d go about it differently. For example they wouldn’t financially back organisations like ISIS, which is what they are doing. This has been well documented by Western media outlets.
Yet the NYT did get one thing right. Striking at Russia is a crucial part for why oil prices are at current lows. As an economy that relies on oil exporters, Russia’s budget has taken massive blows over the past year. Russia sits on the eighth largest proven oil reserves in the world. And oil accounts for roughly one fifth of its gross domestic product. When it announced recently it expects a budget deficit of US$39 billion this year, you can see why.
Are we really meant to believe then the Saudi’s are damaging their economy for the sake of Syria? No, I don’t either.
What Saudi Arabia is instead is a scapegoat. It’s actually acting as the perpetrator on purpose. In doing so, the mainstream can pretend that it’s the Saudi’s, and not its backers in the US, that are really behind all this.
It’s an odd thing to say. After all, why would the US encourage Saudi Arabia to weaken oil prices? Why would the Saudi’s go along with it? And what’s more, why would the US destroy its own shale oil industry in the process? It doesn’t make any sense. Not if you’re looking at it from the angle of supply and demand economics, anyway.
Yet when it comes to politics, the world works differently to how a lot of people imagine. The US would happily throw its domestic shale producers under the bus if there was a benefit in doing so. And it just so happens that there is.
Don’t believe that? Then why would the US support the easing of sanctions against Iran? Why would they bring Iran back into the international fold if they were worried about US shale producers? Iran’s re-emergence on the global scene is going to flood the markets with at least another 500,000 barrels of oil a day. How’s that going to work out for shale oil?
The US doesn’t care about any of this. Protecting its shale market isn’t the number one priority. Of far more urgency is the need to ensure that its foreign policy succeeds above all. If there’s collateral damage from that, like a dead shale industry, then so be it. There are bigger fish to fry.
And really, this is where we begin to touch at the heart of what’s really going on.
Consider that some of US’ chief rivals, like Russia, Venezuela and Iran, are all major oil producers. In fact, they’re all among the top 10 oil producers in the world.
They also all have anti-American foreign policy. Is it any coincidence that oil is being driven down so low? But why are prices falling now? Couldn’t they have pressured OPEC into lowering oil prices 15 years ago? Well, yes and no.
They certainly could have if they wanted to, but there was no need. Russia wasn’t showing any ambition of reasserting its dominance as a global player at the time. But it is now. Should it come as any surprise then that prices just so happen to be falling today? You wouldn’t think so.
Why the Saudi’s have no choice but to listen to their masters
An important note to all this is that Saudi Arabia doesn’t really have a say in any of it. We know that the US wields considerable influence over the Saudi’s. Were it not for the US guarantee to protect the ruling House of Saud, they’d be living on borrowed time. This is a country where a minority Wahhabi ruling class lord over a majority Sunni population. The masses wouldn’t mind seeing the end of the House of Saud. The only thing that protects them is the US. And when the US says jump, the Saudi’s ask ‘how high?’
Saudi Arabia is leading the drive to lower oil prices, but it’s doing so at the behest of the US. With that in mind, it’s not hard to imagine the US influencing Saudi foreign policy. As Ulson Gunnar, a writer at New Eastern Outlook, notes:
‘Instead of focusing on Saudi Arabia and claims that it is solely responsible for global oil prices being cut in half despite no discernible changes in supply and demand, the global public should see a wider confrontation playing out. The US is using its vast influence over finance, energy, the media and many other economic and political sectors to wage full spectrum war on those resisting its hegemonic expansion globally.’
In other words, you could look at cheap oil prices as nothing but the result of US foreign policy. Saudi Arabia’s supposed moves to destroy shale, or to hurt Russia, are shallow explanations. These arguments screen what’s really happening.
Behind the curtain of deceit sits the US, pulling the strings of the puppets it manipulates. The end goal of low oil prices? Nothing short of the removal of the Putin administration.
Already, one its major rivals, Iran, is back in the US good books. Venezuela can’t project influence on the world, so they don’t concern the US all that much.
Which leaves Russia. That’s the real prize for the US.
This will all make a lot more sense when oil prices start rising overnight. You’ll know the exact moment that happens. It will be the same moment where Russia reorients itself to the West. That could happen with Putin still in power. But it’s more likely to take place when he’s out of the picture.
Until then, we can expect low oil prices to remain as ‘crazy’, and ‘irrational’, as they’ve been.
Junior Analyst, The Daily Reckoning
PS: While oil is still heading towards its bottom, the future for commodities remains optimistic.
Investment guru Rick Rule says there are three commodities which are set to explode over the next few years. He believes they could herald the start of a new cycle of commodity driven growth.
Rick is the founder of Sprott Global Resource Investments, one of the world’s leading resource investment firms. He’s witnessed several cycles come and go in his 40 year career.
Rick has a knack for spotting industries, and companies, that are the cusp of new cyclical booms. Rick wants to share what he’s learned, which is why he’s put together a free video for you. In it, Rick reveals his top three commodities that will flourish for the rest of this decade. He’ll also show you how to identify the right companies to boost your portfolio as the new cycle gains pace. To find out how to watch the special report, click here.