Twin Butte Energy Ltd TBTEF

RE:My Take - Part 2

[Nawaralsaadi]

PM, I take issue with the assertion that Saudi Arabia has nothing to lose from following its no swing strategy.
 
Over the last many weeks and months, we have heard multiple times the assertion that Saudi Arabia is repeating the 1985/1986 orchestrated price collapse to gain/maintain market share, and thus by implication, Saudi Arabia is ready to scarify substantial revenues to gain market share.
 
On the surface, the logic presented above by the media (either by purpose or omission) appears sold but it omits a crucial difference (among several differences) : In 1986, Saudi Arabia did indeed cause a sharp price collapse as it changed its swing policy, but it also substantially increased its exports from 2.3m barrels in 1985 to 3.9m barrels in 1986 or a 70% increase in exports as prices declined from an average of $26.5 in 1985 to $14.65 in 1986 or a 55% decline, thus their maneuver was largely revenue neutral. Between 1985 and 1986 Saudi Arabia’s revenues declined by only 6.5% or roughly $1.4B less revenues per year, this was a much smaller drop in revenues than for the rest of OPEC and the rest of the world (except for Kuwait and UAE which followed the same Saudi strategy).
 
Today, the situation is very different. Saudi Arabia is taking a real hard price cut of about $40 per barrel (from the Brent average the last 4 years) without a corresponding increase in production. Thus, they are losing over 40% of their revenues or close to $100 billion per year due to their decision not to swing produce.
 
Those who believe that Saudi Arabia will maintain this strategy for more than few months are sorely mistaken, if prices don’t adjust higher in early 2015, Saudi Arabia will likely adjust course regardless of whether they have achieved their political goals (even in 1986 they adjusted their production lower in the latter part of the year). The price Saudi Arabia is paying today to maintain its current strategy is too costly in comparison to a slight adjustment in production over the next couple of years. If anything, this price swoon will convince all participants to adhere to their quotas and may even get Russia to pitch in as well, and we will hear once more that the death of OPEC was greatly exaggerated.
 
Regards,
Nawar