Saudi Policy Tied to Weak Economy
To recap, in mid-2014, Saudi Arabia decided to pump more oil into the market that was already starting seeing rising supply. U.S. shale was largely blamed for the so called supply “glut,” but in reality it is the Saudis/OPEC that are actually over supplying the U.S. market as imports are currently soaring. Imports are up 10 percent compared to last year even when domestic supplies are plentiful.
There are two realities: one portrayed by the media/headline data and the other is the reality born out of the underlying indicators. The headlines generally say one thing and the underlying data says another. I have previously said that this data distortion is in part tied to central bank policies, which are distorting one asset class (equities) while the commodity sector reacts in a very different manner.
Back in late 2014 after QE3 it was becoming clearer that the U.S. economy was losing steam, a problem that continued into 2015 (I wrote about this recently here). So is it possible that the Saudis realized the same thing: that the global economy was awash in debt and was on unsustainable path following an unprecedented monetary expansion, and thus was in need of stimulus through lower energy prices?
The economics of Saudi Arabia’s move simply don’t make sense on paper…..halving prices when you boost output by 10-15 percent does not compute. But with the recent chatter about an IPO of Saudi Aramco and diversifying away from oil, at the same time that electric vehicles start to come of age (at least in the minds of media), lower oil prices to spur demand makes perfect sense.
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