Saudi Arabia and American frackers are gearing up for the second oil war.
It will take oil lower, but not back to $20 again.
Saudi Arabia has kept its promise. It has cut oil output by 486,000 barrels a day, in line with the OPEC agreement the Kingdom pulled together last October, helping oil stabilize above $50 per barrel.
And it has set up an example for the rest of OPEC and Russia, who have kept their own promise to stick with the October accord, officially at least.
For a while things in the oil market seemed like back in the old good days: oil prices headed north, approaching the magic number of $60, and the Saudi Kingdom was talking up its grand plan, the Aramco IPO.
But in the last three days the oil market has gotten oversupplied, and oil prices are heading south again, dropping below the other magic number, $50.
Apparently, American frackers—the new swing producers—did it again. They have flooded the market with oil to fill in the shortfall generated by OPEC and Russia, as evidenced by the rise in oilrigs—up 288 from last year to 768, and the growing US oil inventories.
That’s why American frackers and Saudi Arabia are headed for a second oil war that will take the price of oil lower – but as mentioned previously, not back to the $20s. Saudi Arabia won’t let it happen.
For a number of reasons. First, the Kingdom has learned a lesson the hard way: it cannot end the American fracking revolution by engaging in a price war with the frackers — who have demonstrated an exceptional ability to survive even at extremely low prices.
Second, Riyadh’s leaders do not want to antagonize the new Washington administration by declaring another war on American frackers.
Third, there’s Riyadh’s grand plan: the Aramco IPO — float shares of state-owned company Aramco to the public to pay for its vision 2030, which will make the Saudi economy less dependent on oil.
The success of Aramco’s IPO, which promises to be the biggest in history, depends heavily on the situation in the oil and equity markets at the time of the “road show”– the date for marketing of the IPO. The higher the oil prices, the easier it will be to pitch Aramco to institutional investors at a high price.
Fourth, the Kingdom may be running out of oil faster than previously thought. Its major oil fields have become mature, and new fields are hard to come by, which adds to pressure to launch the Aramco IPO sooner rather than later.
That’s why Saudi Arabia will pursue a radically different strategy this time around: continue to cut oil output to forestall price declines, even if that means giving a “free ride” to American frackers.