Pam Martens and Russ Martens: October 7, 2014
In the mid 1980s, there was a different King and a different oil minister in Saudi Arabia than present today, but, other than that, the threat of an oil price war within the ranks of OPEC has all the hallmarks of early 1986.
Typically, cartels like OPEC are supposed to act in unison on prices. But last Wednesday, Saudi Arabia’s state-owned oil company, Saudi Aramco, stunned world oil markets by acting alone in cutting its official crude price by $1 per barrel for November deliveries to its Asian customers. It also dropped its price by approximately 40 cents per barrel to U.S. and European customers.
If this is the opening salvo of a replay of 1986, be forewarned that crude oil prices plunged by over 50 percent in less than eight months in that era.
The Saudi oil minister in 1986 was Sheik Ahmed Zaki Yamani – a non royal simply bestowed with the title Sheik. Yamani stepped into the post in 1962 and was effectively the man who kept OPEC producers in line. But in 1986, cheating on production was rampant. In an effort to shore up world oil prices, Saudi Arabia had already cut its production below its quota of 4.3 million barrels per day to almost half in hopes of stemming the oil price slide amid a global glut.
But fellow OPEC members continued to cheat, leading Saudi Arabia to effectively launch a price war to grab market share for itself, leading to more rampant production quota cheating among OPEC members. The fallout was potentially more extreme than anticipated by Yamani. The price of crude fell from $23 to $9 and change. On October 29, 1986, Yamani was unceremoniously fired from his post by Saudi King Faud.
Fast forward to 2014. The new players are King Abdullah and Saudi Arabian oil minister Ali al-Naimi. U.S. domestic crude, known as West Texas Intermediate or WTI is at 17-month lows while Brent, the international benchmark, is trading near 27-month lows. In early morning trade, WTI was below $90 at $89.39 with Brent at $91.79.
Making the situation even more volatile today, the International Energy Agency, which has cut demand prospects in its last three monthly reports, is due out later today with a new assessment. In its September 11 report, it called the slowdown in demand “nothing short of remarkable.” Adding to concerns of a growing supply glut are the economic woes in Europe and China.
Rumors also abound that Saudi Arabia would not be saddened to knock out some of its higher-cost rivals in a prolonged price war and that it has the fiscal resources to endure a prolonged siege. It is estimated that shale oil production in North Dakota and Texas require a minimum of $70 to $80 a barrel to operate profitably. Any dramatic price decline as occurred in 1986 would put those operations in serious jeopardy.
