What gives us greater confidence in this scenario is the fact that the Saudi officials have suggested that they are prepared to accept these lower oil prices for up to two years. That time period is longer than the near-term impacts suggested by some of the other scenarios. More importantly, the time frame is too short to derail the U.S. shale effort, especially since the marginal cost of that effort is $70-$77, or below the low end of the Saudi target oil price range. Two years may be how long it will take for lower energy costs to help Europe to recover. The last point about this scenario that seems quite interesting is the timing of the Saudi disclosure, even though it has been offering small price reductions to Asian and U.S. buyers in recent weeks. The Saudis appeared to disclose their price strategy almost immediately following the European Union’s decision to not label Canada’s oil sands as “dirty” oil. That ruling opens up this market to Canadian oil sands producers, just at a time when they are struggling with rapidly escalating development costs that has even caused some projects to be delayed. From our chart of marginal oil costs, oil sands is just at or above the top end of the Saudi target price range, suggesting that the Kingdom wants to make sure that by continuing to hold an umbrella above oil sands’ costs it would concede the European market to Canada. Essentially, the Saudi oil pricing strategy is all about attempting to restart economic growth that the world desperately needs for its political health and the Saudis and its fellow OPEC members need for their oil exports. The unknown unknowns (tip to Donald Rumsfeld) of this strategy are what we should be worrying about.
Here is a link to the full report.
Regardless of the motivation behind the offering of discounts to Asian and European buyers, the fact remains that Saudi Arabia’s decision has had an impact on pricing and puts pressure on the more expensive sources of new production.
Brent Crude Oil steadied last week in the region of $82 but has not improved on that performance in a meaningful way. Despite the fact an overextension relative to the 200-day MA is evident a rally of greater than $5 from the low will be required to question the consistency of the short-term decline.
Existing Canadian oil sands production is cheaper than the current price of oil but the cost of adding new supply will be under pressure. Canadian Oil Sands Trust (Est P/E 11.17, DY 7.67%) dropped abruptly from late September to retest the 2008 lows. It has at least paused over the last week and the low at C$17 will need to hold in order to demonstrate bargain hunters have returned to dominance.
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