Saudi Arabia launched a third-wave attack this week in its oil price war with the U.S. shale oil producer. First they cut prices, then they refused to cut production, and now they cut prices again.
Oil prices fell Thursday when Saudi Aramco, the state owned oil company, showed no sign of retreat and cut its price on its Arab light to a record low $2.00 discount to the local benchmark for customers in Asia and prices for all grades of crude to U.S. refineries. Not even an insipid market reaction after comments from ECB President Mario Draghi that railed the Euro was enough to give oil support in the aftermath of the Saudi price cutting offensive.
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At this point what has to be clear is that the Saudis will defend their market share, whatever the cost may be, they will cut prices in Asia, they will cut prices in Europe, they will cut prices in the U.S., they shall never surrender.
They won’t surrender because they know that their economic existence may come down to winning this price war, and if you want to know why the Saudis will give you 36.5 billion reasons. That is number of barrels that the Energy Information Administration now says we have in proven oil reserves in the United States, a 9.4% increase and the most amount of oil we have had since 1975. The Saudis realize that as our technology in the U.S. will continue to allow us to expand the amount of oil that we can feasibly get out of the ground, and if they don’t try to make that economically more difficult, they will lose their stranglehold on the West as well as the oil global market place.
The fears are becoming more acute as the debate to export oil in the U.S. is heating up and politics are in play. The ban on oil exports from the days of the oil embargo may fall as the U.S. looks for a way to respond to the actions of Saudi Arabia. Lifting the ban would allow U.S. oil producers to sell oil in global markets where they can command a higher price.
Not only that, the U.S. State Department is now appointing a “top diplomat for energy affairs” to try to leverage our new energy producing clout with other countries. The Obama administration named Amos Hochstein to the new post.
In the meantime, another beneficiary of the Price War might be “Big Oil”. No not including the small shale companies but really “Big Oil.” Exxon Mobil’s CEO said that Exxon (NYSE:XOM) can afford oil at $40 a barrel. So in other words, like vultures they will be able to swoop up the shale producers that end up going under.
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