PIPELINE
the newsletter of Panhandle Producers & Royalty Owners Association • Vol. XCII • No. 7
The Saudi Price War
The Saudi-OPEC price war is now nine months old. Two OPEC meetings have passed
without revisions or changes in strategy. It is a war against high cost unconventional
American producers as the principal threat to market share.
The West Texas Intermediate price per barrel has recovered since the low of the mid 40
dollar bottom to slightly above 60. This has become a trading range with algorithms
following momentum making a price range. Financial or paper traders and speculators have
moved the price of oil in a “rally” up 15 dollars.
Oversupply still overshadows the market. The balance of supply and demand awaits the
onset of winter or 2016. The market share for OPEC and Saudi Arabia continues to expand
at the expense of Non-OPEC, but American shale or unconventional production has not
declined to the point that an acceptable world balance between supply and demand appears
to be in the making.
The CEO of ConocoPhillips was invited to the recent preliminary OPEC meeting and he challenged the producer
countries with a warning: American “high cost” production will survive the price war with cost-saving efficiency in
process and yet to come. This promises American oil supply at less cost and a prospect of little change in world supply
while demand remains weak and possibly weaker with China importing less crude as well as iron ore and other
commodities.
What is now the play in oil price formation is geopolitics. The Gulf in the Middle East is in a war -- Shia and Sunni, Iran
and Saudi Arabia—with the frontline in Iraq. Is the Islamic State of Iraq and the Levant (ISIS) a threat to the OPEC
supply of crude oil? The reality “on the ground” is negative. ISIS requires the revenue from oil and not its disruption.
If, however, one day there is a confirmed attack upon Saudi Aramco oil fields and refinery infrastructure, the speculators
and hedge funds will buy oil and the price could reach $75 or more per barrel. If the damage was serious enough to take
Saudi production off-line at the rate of 300,000 barrels per day the price of oil could approach $90.
Libya is too small a producer to matter as a geopolitical variable in an upward price move. Military events in Iraq could
affect oil production in a downward supply scenario. However, no war induced “scorched earth” option is likely as the
Kurd interest continues to sustain oil production and pipelines to export markets.
At the end of the month, the geopolitical impact of a nuclear non-proliferation treaty with Iran would release Iranian oil
supply from the constraints of sanctions. Iran can export 1,500,000 additional barrels per day. The Iranian post-treaty
supply to an over-supplied global market would lower the price of West Texas Intermediate indirectly to a range of $38 to
$46 which eliminates the recent rally of this year.
It is not clear if OPEC can manage the Iranian supply which creates new conflicts for the cartel. It also creates cash flow
pressures upon Southwest and Dakota unconventional producers and a new round of efficiency and cost measures.
Saudi cont’d on p. 4
The Saudi Price War .................................. 1
From the Wellhead ..................................... 2
From the EVP ............................................. 3
Markets ....................................................... 4
Vetoed ......................................................... 6
86th Convention .......................................... 8
Casenote................................................... 10
Membership and Advertising ................... 12
New and Renewed Members ................... 13
Locations .................................................. 14
Permits ..................................................... 15
Monthly stats ............................................ 16