Commodity price, Commodity risk, Economics, Energy crisis, Hedging, Market research, Market trends, Oil market, Policy, Social development

The coming oil price shock: troubling news from Saudi Arabia

Summary
  • Saudi Arabia’s largest oil field, accounting for about half of the kingdom’s output is producing 35% less oil than previously thought.
  • Several independent sources confirm that Saudi Arabian production is in a permanent and irreversible decline and may cease exporting oil altogether by 2030 (this is less than 11 years away).
  • Most oil analysts tend to shrug all negative news, invariably invoking one magical ingredient of the oil market mix: shale. But this story is also losing traction.

On April 1, Saudi Aramco published a bond prospectus revealing that their largest oil field, Ghawar is producing 3.8 mb/d – only 65% of the 5.8 mb/d previously thought. Given that Ghawar accounts for about half of the knigdom’s production, this is a rather staggering revelation. A few weeks ago I outlined why I believe we might be facing a new oil price shock in the near future. In sum, this much is non-controversial:

  • most oil exporting countries are past peak oil and in permanent production decline;
  • conventional production is declining by between 4% and 9% per year (!);
  • U.S. shale oil production is falling well short of the optimistic assumptions from only a few years ago;
  • geopolitical tensions – much of them related to an undeclared but discernible scramble for energy resources – seem to be worsening.

In all, we are looking at a very volatile mix that could catch spark at any time in the near future sending oil prices to new highs. Let’s keep in mind that the British Ministry of Defence projected that the barrel would vault to $500 by 2040.

But this issue is much larger than making a few bucks. If there’s one reason why we should all be concerned, it is this: today, 50 times as much work is powered by fossil fuels as by physical labor. The disruptions likely to unfold from the next oil price shock could be very severe.

Below are links to a 5-part series of non-technical articles. As a commodity trader and oil market analyst with 20+ years of continued practice, I believe these are the most relevant stories framing the big picture:

  1. Making sense of Saudi Arabia’s oil reserves and production capacity
  2. Oil production and the evolution of drilling technologies
  3. Revisiting the peak oil hypothesis
  4. Sources and quality of oil market information
  5. How should industry players cope with risk and uncertainty of the looming crisis

For investors and traders looking at volatile and unpredictable price fluctuations, I suggest systematic trend following as perhaps the most reliable method of catching large-scale price events (see here and  here).

As individuals, traders and investors we can only manage our own risks. But in this case we must also pressure our policymakers to seek out good advice and make wise policy adjustments to achieve the smoothest possible transition into an unknown future. The world our children and grandchildren will inherit promises to be very different from what we know today.

Alex Krainer is a hedge fund manager and commodities trader based in Monaco. In 2015 he has published the book “Mastering Uncertainty in Commodities Trading” (so far 5-star rated by genuine reviewers – no reviews are from friends and relatives)

Description: Trading and hedging commodity price risk

 

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