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Saudi Arabia Should Threaten Massive Production Cut (Video)

Tuesday, November 29, 2016 10:50
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By EconMatters


We discuss the current OPEC power struggle in this video. Saudi Arabia is losing the power struggle within OPEC. Saudi Arabia has tried threatening upping production to motivate Iran and Iraq to agree to a Production Cut Framework Deal, but this hasn`t worked.

Maybe if they switched strategies and threatened a massive production cut of their own, so big that the oil market would need Saudi Oil bad, and then enforce favorable contracts with customers, i.e., reducing Russian and Iranian Market Share through contract terms, and this reinstates Saudi Arabia as the Power Player in the Oil Markets and makes them again the swing producer.

They need to reverse the current psychology in the market with their oil peers in OPEC. They can lay the ultimatum out on the table and say to Iran, Iraq and Russia that there is another way they can force production cuts and gain market share through withholding Saudi Oil from customers as they are the only country capable of withdrawing that sizable amount of oil production.

The irony is that it would work because Saudi Arabia would get the same amount of revenue from half the production as oil prices would double in price in two weeks, and as oil prices keep rising Saudi is again the swing producer in the oil markets.

Saudi Arabia needs to reverse the psychology of the oil market right now which is in a never ending negative feedback loop. Just without 5 million barrels per day of oil production, and oil is $85 a barrel in two weeks and climbing and all the sudden customers will cut any deal with Saudi Arabia for the other 4 to 5 Million Barrels of spare capacity, i.e. agree to buy less Iranian and Russian Oil on the margin.

They need to be willing to do it, but the threat alone would move negotiations with Iran and Russia. Furthermore, Saudi Arabia is the only producer who has the means to cut this kind of production. It is a counter intuitive strategy but it would work, it all the sudden swings the power card back in Saudi Arabia`s direction as the dominant player in the oil market.

Saudi Arabia and OPEC cannot continue to give away their resources below the level needed to meet their budgetary needs, this is just a recipe for disaster, and threatens the stability of their countries and governments as going concerns. They need to change the feedback loop, and make it a positive reinforcing feedback loop raising the value of their main source of country revenue in terms of the oil commodity. This means less oil production, and not more oil production.

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