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Island Investing

Riffs, rants, and the upside of investing from way off Wall Street


This Week’s Sign We Are Sleepwalking Into a Supply Crunch (#7)

News from Reuters this morning that gives a little more credence to the theory that Saudi’s reluctance to balance the oil market may have been heavily politically motivated – but targeted at Iran, not U.S. shale drillers.

Here is the full article, the gist of which is that Saudi Arabia has offered to reduce its oil production (back to levels from earlier this year) if rival Iran agrees to cap its own output.

And I think it’s relevant here because if in fact Saudi has “weaponized” its oil policy, then the Kingdom’s own immediate security interests would likely crowd out any concern the world’s most important oil producer might have otherwise had about a global supply shock a little further down the road.

Here is what I wrote last November in Part Three of my monster thesis about oil and U.S. E&Ps:

If my wild speculations are true, it means, among other things, the true price war here is Saudi versus Iran and Russia, not us. It also underscores that one of the primary reasons for the decline in oil prices was Saudi rhetoric. And let’s not confuse that with a serious problem in the oil markets. Which, you know, we don’t have. Remember that math about the oil “glut.” This current price collapse could, in a single policy announcement, go away tomorrow.

If true it would also put that whole Russia-and-Iran-teaming-up-in-Syria thing in a bit of a different light, no?

In the mother of all ironies, it could also mean that Iran might have rescued U.S. tight oil companies. The re-entry of Iran into the global oil market means that unless OPEC wants to tank the price of oil even further, someone is going to have to cut some production. And that someone will almost certainly be Saudi, who because of Iran, would seemingly have to resume their role as global swing producer in 2016, too.

And, wa-la. Price war, over. But threat of real war? Eh, not so easy.

And finally, and probably most importantly, this theory of mine if true would mean the world’s biggest oil producer is so privately concerned about regional economic and military conflicts from a resurgent Iran that it was willing to talk down oil so much that it blew a massive hole in its own budget.

Course, this could all just be confirmation bias. “You see what you want to see” and what-not. But, well, I don’t think it is.

And to be clear – I wouldn’t bet much on the possibility of Iran agreeing to Saudi’s proposal. And I say that in spite of my own serious doubts about Iran’s ability to ramp production much more in the near-term, anyway. The river between these two enemies just seems too wide.

But even if I have completely whiffed on Saudi’s true motivations here, that shouldn’t affect the outcome for oil prices – they should begin moving higher, and relatively soon.

Disclaimer: This post nor any of the material linked to herein in any way constitutes investment advice.