A Christmas Present from the Saudis

Why are oil prices falling?

Source: Arab News

The short answer is, because Saudi Arabia wants them to. A recent Wall Street Journal article notes that the Saudi oil minister, Ali al-Naimi, is concerned that North American shale oil producers are gaining market share at the Kingdom’s expense. Back in September oil was priced at $90 / barrel, at the low end of its recent price range. Naimi went on vacation, removing Saudi Arabia from a public debate over how OPEC should respond.

But by mid-October, as prices continued to slide, the Saudi minister met with his Venezuelan counterpart to see if they could forge some kind of agreement among OPEC and non-OPEC nations to reduce production. It didn’t work. Russia balked at trimming how much it pumped, claiming a cut could cause it to lose permanent capacity in some of its arctic fields.

Source: NASDAQ

So when ministers met in November, they maintained their levels, saying falling prices would be painful, but losing customers to shale would be worse. The result has been $55 / barrel for crude and $2.40 / gallon for gasoline. And US shale producers might continue to pump anyways—existing wells may be profitable even if it’s no longer cost-effective to develop new fields.

Lower energy prices will be an economic tail-wind for the developed economies of the US, Europe, and Asia. Saudi Arabia may not observe Christmas, but their production levels have given the world a nice stocking-stuffer.

Douglas R. Tengdin, CFA
Chief Investment Officer
Phone: 603-224-1350
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