Was the Saudi Oil Attack Planned to Boost Oil Prices?
The price of oil will finish the week just under $60 per barrel, ending with one of the biggest weekly gains in decades.
Crude prices spiked early this week following news of a drone strike targeting a Saudi oil facility, which reportedly pulled the plug on half the country's crude production.
Crude Oil (One Week)
Authorities on all sides have had the media running around pointing fingers to blame each other.
But there is growing suspicion on the sidelines that this drone attack was part of a new effort to control oil prices.
I know this sounds a bit like a conspiracy theory. But hear me out...
There is no doubt OPEC has used its influence to control the price of oil in the past. For decades the cartel has been able to successfully move oil prices either up or down at its will with production cuts or increases, respectively.
And for decades that worked well.
But beginning sometime last year, something seemed to change.
OPEC production cuts and increases became less important to the market. And announcements of such supply changes had less direct effect on oil prices than in previous years.
Back in December 2018, I wrote an article to you asking, “Is OPEC Dying?” At the time, OPEC was talking about cutting oil production.
But the announcement had only a small and short-lived effect on oil prices. I questioned in that article, “Is OPEC losing control of the market?”
And as I mentioned, others also noticed OPEC's loss of power. In a Financial Times Opinion section that weekend, there was an articled titled “OPEC Is Not The Power Broker It Once Was” that suggested that directly. The article was subtitled, “The old methods of controlling prices by restricting production no longer work.”
If production cuts and increases don't have the power to control oil prices as before, is it possible OPEC has stepped up its game to involve destruction of infrastructure?
Well, if we look back through history, we'll find others have done a lot worse in efforts to control resources.
I'm not trying to make any justifications, but at the end of the day, here's what happened:
A bunch of pipes and containers got destroyed... no one even got hurt.
Some oil plant went boom.
Some oil plant went boom, and the best part: everyone wins.
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Think about this: As a result of the attack, oil prices increase, benefiting every other oil-producing nation. They're all winners.
And that includes the United States, currently the world's largest oil-producing nation.
Saudi Arabia even benefits. Sure, it'll lose production for a few weeks. But now it gets to rebuild the thing.
The attack was on the Abqaiq oil facility. This thing is the largest oil facility in the world and the crown jewel of the Saudi economy.
Consider that more than half of Saudi Arabia's GDP comes from oil. And the Abqaiq oil facility is the nation's biggest cash cow. It's getting repaired quickly without regard for cost. That will be great for the local economy there in Saudi Arabia.
And just think of all the local politicians in Saudi Arabia who now have months of anti-Iranian fodder to feed to their constituents. The Donald Trumps of Saudi Arabia are having a field day with the attack.
(Except the consumer, of course. But in geopolitics, the consumer isn't part of "everyone.")
If production cuts and increases don't do the trick for OPEC anymore, I don't think it's crazy to suggest it's possible they've stepped up their game to involve drones and destruction.
Remember, this is the second time in three months we've seen oil prices jump after recent conflicts involving Iran and drones. Oil prices jumped almost 5% after Iran shot down a U.S. surveillance drone in June.
Is this the beginning of a trend?
More importantly, what happens when just destroying drones and oil facilities also become useless tools to control oil prices? Will something even more destructive be required?
Let's hope not.
Until next time,
As an editor at Energy and Capital, Luke’s analysis and market research reach hundreds of thousands of investors every day. Luke is also a contributing editor of Angel Publishing’s Bubble and Bust Report newsletter. There, he helps investors in leveraging the future supply-demand imbalance that he believes could be key to a cyclical upswing in the hard asset markets. For more on Luke, go to his editor’s page.
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