Thread by @anasalhajji

Thread
Random thoughts on #oil market

1- Oil is a vital strategic commodity that is interlinked with politics on both sides: supply & demand

2- Oil demand is a function of economic activities & technology

3- Economic activities are a function of economic systems and politics

4- The oil industry is capital intensive and highly technical, yet dangerous.

5- Most of the cost in the oil industry is up-front cost (% of fixed cost or sunk cost is high)

6- Oil reserves and production are relatively concentrated.

7- The oil market is NOT competitive

8- Oil industry's history tells us that to improve efficiency, reduce wastage, and preserve natural resources, the market needs to be managed. If the industry has no manager, governments will step in to manage. Saudis gave up management last week Trump stepped in yesterday

9- OPEC+, OPEC/Saudi Arabia can manage only extreme volatility in the market for a simple reason: OPEC is not a cartel. OPEC has no market power. Saudi Arabia has limited market power: relatively small market share of crude and products when compared to the 7 Sisters and TRRC.

10- The industry, with Saudi Arabia as the leader, is highly influenced by messaging from various parties & by global events. Wrong forecasts in 1997 led to the wrong decision of increasing OPEC output. Asian crisis hit, accompanied by two warm winters & Venezuelan production ⬆️

11- Oil prices tanked to below $10. OPEC cut production with Saudi Arabia, as usual, making most of the cut. Oil prices improved but in an election year. Clinton/Gore released oil from the SPR to lower prices. That was the first "political" use of the SPR.

12- OPEC was scheduled to meet & cut production when the terrorist attack on September 11, 2001, happened. Flights over the US were banned for a few days. oil demand tanked. Again, think about how OPEC is influenced by events: OPEC refused to cut production, despite ⬇️ in demand.

13- Because of a major decline in upstream investment during low oil prices in 1998-99, #SaudiArabia wanted to compensate & expand its capacity to avoid future supply shortages. Western consultants told KSA that it will be a waste of money. Central Asia soon to flood the market.

14- Again, think about "concentration" and "messaging here: Western consultants told KSA that the oil deal of the "century" that was signed in Central Asia will flood the market and keep oil prices low for a long time. Saudi Arabia canceled its expansion plan!

15- Boy, those western consultants were way off: by 20 years to start, and for only a small amount. What was the result? Lack of investment led to the highest oil prices in history, reaching $147 in 2008. But before that, we also had a problem 👇

16- Preparation for the invasion of Iraq included massive build-up in floating storage, which was released, along with the SPR, on the first day of the invasion on March 20, 2003, leading to lower prices, at a time when many in the market thought prices will increase.(same in 91)

17. Sars also hit at the same time in 2003. It reduced the demand for jet fuel and consequently oil demand. The hype of SARS ... well, no explanation needed. Sounds familiar now?

In this environment, who will invest in upstream?

18- It was clear at that time that lack of investment over several years was going to lead to a major increase in oil prices. No one paid attention to a 2003 article I wrote with my colleague Jim Williams on the "Forthcoming Energy Crisis"

19- Prices started rising, $50, $70, $80, $100, $120 etc. But for some reason, economies of OECD, India, and China continued to roar.. higher oil prices have not stalled economic growth. What happened? was the economic literature wrong? Have consultants missed again? YEP.

20- Consultants misunderstood the relationship between macroeconomic variables & oil prices. It was the only time in history where oil prices, govt & military expenditure, incomes & wealth were⬆️, while interest rates, US dollar & taxes were decreasing. A significant lesson here!

21- There was some negative impact on the economy from higher prices as certain segments could not afford $4/G gasoline. But to say that high oil prices caused the financial crisis and the recession is awfully wrong.
Regardless, the financial crisis reduced E&P investment

22- With the reduction in investment, the outcome was clear: higher prices. But shale oil came along, & changed everything, taking advantage of higher prices from lower overseas investment & political events of the Arab Spring that lowered oil supplies. The SPR was also used.

23- OPEC went through the five stages of grief with shale in five years. ignoring it in the early years was a mistake on their part. When KSA decided to crash the market at the end of 2014, it was about other OPEC & none members (Iraq, Russia)... Sounds familiar?

24- As for shale, the reaction was not only about crude, but it was also about NGLs, refining, and petrochemicals.
The lesson is clear: do not get fixated with shale as crude, it is about other things too. See articles on the topic on my web site or google them.

25- Now history is repeating itself: Disease,⬇️economic growth, warm winter, producers' disagreement, SPR, ⬇️interest rate,⬆️govt spending.
Here is the irony: Massive spending on security at airports to fight terrorism was made. We are doing the same now, but the enemy is Corona

26- Looking at the current situation, judging by history, a future energy crisis is being engraved in stone as we speak. Timing is difficult. It is not a matter of will it happen, it is a matter of when will it happen.

Finally: The oil market has a habit of repeating itself.

correction, its was labeled "game of the century"