June 9, 2011, at 1:42 pm
Dr. Philip Verleger’s knowledge of the oil industry is, in our opinion, second to none. We had seen the announcement and e-mailed Philip on Sunday and we both agreed that the Saudis “were up to something.”
This decision, we thought, coming only a few days before the OPEC meeting… which by then we knew would be rancorous and would end in an “ugly” fashion, meant that the Saudis were moving in rather unusual ways and were about to do something that would be detrimental to the world’s oil consumers without doing damage to their own global stature. Thus, when the meeting ended amidst confusion, Dr. Verleger sent us the following note, reprinted here in full with his permission. He said:
“Saudi Arabia has just pulled off one of the most remarkable public relations operations in many years. Last Sunday Saudi Aramco announced it was reducing the discount offered for its medium and heavy grades of crudes. The reductions in the discounts will make Saudi crude oil less profitable to refine and should, other things being equal, lead to a reduction in purchases of Saudi crude. The cuts will, however, likely boost Saudi revenue – the goal of every profit maximizing entrepreneur.
However, the country’s leaders cannot be seen to be trying to raise prices, even if it is the optimal decision for an oil producer. Thus, the country’s oil minister went to Vienna and called for an increase in quotas. When the proposal was rebuffed by six other members of the organization, the oil minister held a press conference and said Saudi Arabia would offer more oil. It was a brilliant coup. Saudi Arabia comes out looking like a friend to the west, promising to produce more oil. In response, energy policy officials in consuming countries will back off from their threats to release strategic stocks.
In the mean time, the firms that buy and refine crude oil are left holding the bag. Their losses will mount if they buy more crude. On the other hand they will be attacked by politicians across the globe if they do not buy oil and build inventories for the later part of 2011.
The really stunning development was the failure of any of the reporters to understand the game. I can understand the failure of market analysts in New York to understand the Saudi strategy. These individuals have been taught and now teach that the Middle East and OPEC quotas are everything. Truly amazing!”
Philip is right; the Saudis have out-smarted everyone. This ploy was sheer brilliance on their part and we stand back and applaud them for what they’ve been able to pull off. Oil prices sky-rocketed and will head higher still and the Saudis look not only blameless, they look like the good guys in the story. You have to stand back in awe and admire the sheer brilliance of the chess move. Check and check mate! Oh, and prices are heading materially higher even from here.
Disclaimer: I’m not an investment advisor and these articles are for commentary only. For specific financial advice you should consult your own investment professional.
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