If there was any doubt on which country that Saudi Arabia was targeting with their price shattering oil production, there is not any doubt now.
While Russia, Iran and Venezuela might turn out to be collateral damage in the Saudi oil production surge, the message that Saudi Arabia is trying to send is to the US shale producer.
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The Kingdom made no secret of their displeasure Monday when they cut oil prices to U.S. buyers while raisng them for everyone else in the world. Saudi Aramco next month will sell its Arab Light to clients in Asia for 10 cents less than Middle East benchmarks, the November discount was $1.05 yet it lowered prices for all grades to the U.S. The plan to maintain market share in the U.S. and bury the U.S. energy producer because they are the biggest threat to them and because the Saudis feel that the U.S. is allowing their production to explode broke a promise.
Back in January 2006, President George W. Bush said that the U.S. needed to break its addiction to oil and pledged to cut U.S. oil imports from the Middle East. At the time, the Saudis were shocked and threatened to cancel plans to spend $50 billion to expand production in the Kingdom to meet what at that time seemed to be a pattern of ever expanding global oil demand growth. The Saudis made no secret of their displeasure with President Bush and the President had to reassure Saudi Arabia's King Abdullah that he would continue to cooperate with the kingdom on energy issues, even after his pledge to wean America off Middle East oil. Bush later sent a letter to Saudi King Abdullah pledging to honor a 2005 agreement the two reached at Bush's ranch in Crawford to work to expand production.
Of course at the time the Saudis had no idea just how prolific the U.S. shale oil producer would be. The Saudis are used to U.S. energy secretaries calling them on the phone to plead with them to keep the market well supplied. The Saudi fear predictions the U.S. oil imports could fall to zero by 2037 as a reason they need to nip the U.S. oil producer in the bud. They are threatened by U.S. oil production and they are acting to try to break the U.S. producer’s back.
That is one of the reasons todays balance of trade numbers will come in much better. The U.S. not only has reduced oil imports but has become a major exporter of oil products. U.S. oil imports plunged to the lowest level since 2009 in June. The September trade deficit likely declined to 39.0 billion from 40.1bn in August, a trend that should continue as the oil continues to move and the dollar does not get too strong.
The Saudi plan caused confusion at first as it rallied both the U.S. Benchmark West Texas Intermediate and Brent, but when it became clear the Saudis were attacking U.S. prices it broke as it will add to a growing oil supply glut. With U.S. oil supply widely expected to surge again this week it is adding to the bearish mood.
Still products could find some support. Diesel shortages in some Midwest terminals are leading to a price spike as a pipeline issue in Illinois and strong farmer demand is leading to shortages at some spots. Reports that truckers are moving product to take advantage of high local prices are keeping the buyers on guard.
Ethanol Producers will be watching tonight’s election results and hoping for a Democratic miracle. They fear that if Republicans get in they might look to repeal the Renewable Fuel Standard act or at least change the mandate.
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