Friday, August 30, 2013

Is there a competitive oil market? - ask the Saudis

OPEC production is up based on increased barrels coming out of Saudi Arabia. Production is just under 10 mm barrels a day with an icnrease that will offset most of the recent Libyan shortfall. 

We have a crisis in the Middle East and the Saudis will increase the production to dampen any risk premium in the market. Saudi production is offsetting shortfalls in Libya and Nigeria, but more importantly, it is able to dampen the geopolitical risk premium. With issues in both Egypt and Syria, there is a good reason for an enhanced risk premium, but if supply flow is increased there can be inventory build that will offset any future disruption. Increase production even if not needed. Allow for inventory build before a crisis. Use inventory to dampen the shock. Cut production and allow inventory to move lower. Repeat if necessary.

This game has been played for decades and has saved the globe from a number of price shocks. The issue is always how long can this continue or what happens if there is a change in Saudi policy.  You cannot always bet on increased supply during a crisis.

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