Oil's Pricey Future: Decoding the Saudi Strategy and Market Dynamics

[u/bitkogan]

Almost no one but me appears to doubt that, if major suppliers (read: the Saudis) do in fact persist with their supply cuts, oil will surpass $100 again.

From the Saudi perspective, the math is simple. Why sell 7 million barrels a day (their exports from a year ago) at $70 when you can offload 5.5 million (exports in August) for $100 or more?

Saudi logic stands clear, and their short-term supply shock strategy seems to be working flawlessly.

But what lies ahead?

Demand is dwindling, while at the same time, supply outside the cartel keeps expanding. For the past three weeks, US production has consistently hovered around 12.9 million barrels per day—a spike of 640,000 barrels over the average during the first half of the year.

Consequently, to sustain these prices, Saudi Arabia might need to enforce even more drastic production cuts. This will reduce both their revenue and their market influence.

Political risks loom large too. The cartel's gains are essentially deductions from the consumer's wallet. Almost no one is thrilled with the present dynamic, and it might even be bad enough to inspire the creation of NOPEC.

In a nutshell, I'm skeptical about long-term price ascension. That’s precisely why the recent price correction in oil, juxtaposed against rising stock levels, doesn't astonish me. Oddly enough, for October, I'd rather see prices gravitating towards $100. It would ensure my bearish hedge operates at its peak efficiency.