The Saudi state-owned shipping group Vela is sending 11 supertankers containing 22 million barrels of crude oil to the US this month and next leaving observers wondering why the oil market is being hit with such a large volume in such a short timeframe.
ArabianMoney can only join in the conspiracy theories at this point. The deliveries can have one or two reasons: to lower the price of oil or provide a stockpile for an imminent war in the Gulf of Arabia, or both. There is another suggestion of a complex oil short position requiring actual physical delivery that sounds a bit far fetched for our imagination.
10m bpd record
According to the International Energy Agency, Saudi Arabian oil production rose to 10 million barrels a day in February, the highest for 30 years. The Kingdom is expected to continue to increase output in the coming months, the IEA commented in its monthly oil market report published last week.
This action makes about as much sense as the OPEC decision to raise oil production during the Asian Financial Crisis in 1998. That gave us oil at $10 a barrel in 1999! You have a slowing economy in Europe and in China. Why forces up oil supply into a falling market?
OK so Saudi Arabia has no interest in bankrupting the world economy with high oil prices, and in sterling and euro terms prices are already at records. But equally the Kingdom requires relatively high oil prices itself to avoid deficits and to pay for the new spending needed to keep its population happy after the Arab Spring.
Policy folly?
When you do a highwire act the danger is always that you fall off. Oil producers did that in 1999 by a deliberate act of considerable folly. Is history repeating itself?
Not if Israel is about to strike Iranian nuclear installations. However, there is also a danger of overestimating the consequences of such a strike. What if Iran’s response is limp-wristed and not much actually happens afterwards?
The oil market is massively oversupplied and price would crash through the floor like in 1999. It is the reverse of what most market participants currently expect but then that is why oil prices are so high. Then again a sudden drop in oil prices would be great for an economic recovery scenario, and a pick up in demand for oil. The next issue of the ArabianMoney investment newsletter will be looking at actual instruments for investors who want to gamble on this geopolitical rollercoaster. There are always fortunes to be made and lost in such times.
