Perfect Storm for Oil Started on Schedule and Continues to Build

by David Haggith, GoldSeek:

The perfect storm I predicted against the price of oil in the Ides of March has not fully developed, but all the forces I spoke of are continuing to build. The balmy days that prevailed for oil prices in early March have gone away, replaced by a downdraft that is once again suppressing prices more and more since their peak in mid-March. The storm’s breezes can now be felt in prices that have relinquished 40% of their earlier gains, and the clouds are becoming more apparent to all.

Prices had one of their worst days of the year on Friday of last week and drifted marginally lower again on Monday of this week, stabilizing some on Tuesday. Friday’s pounding came because Saudi Arabia announced it would not participate in the oil supply freeze that it negotiated with Russia since Iran is not going to join the freeze.

image/shtfplan.com

That is one of the major storm fronts that I said would come into prominence as part of the perfect storm against the price of oil. I pointed out a few times that market enthusiasm over talk of a deal (still not completed) between Saudi Arabia and Russia to merely freeze production was ludicrous because the Saudis always said the deal was contingent upon other producers joining and that “other producers” most certainly included Iran, and that Iran most certainly would not join the deal.

Don’t expect Saudi Arabia to flinch and start backing down now that Iran has made clear it will not join the deal by freezing its production. Deputy Crown Prince …

Bin Salman nevertheless said Saudi Arabia was ready to face a prolonged period of low oil prices that have dropped sharply since mid-2014 as a result of higher global production. “I don’t believe that the decline in oil prices poses a threat to us,” he said. (Arab Times Online)

Even if a production freeze is formalized, it’s a bad thing, not a good thing. That makes it all the more silly that talk of the deal pushed down prices for awhile. The deal, if it happens, promises to freeze production at January’s extremely high levels, which absolutely guarantees continued oversupply (unless there is a huge increase in demand, which so far has evaded the oil industry). A freeze is far from being a production cut, which is the only thing that can solve the oil industry’s problems on the supply side. Far too much as been made of the deal by a market full of unrealistic optimists for that reason.

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