Oil: The Battle For Market Share & The Saudi’s 1985 Playbook | Zero Hedge.
Via BofAML’s Jake Greenberg,
OIL: the battle for market share & the Saudi’s 1985 playbook
Stay positioned for “a good sweating” = stay short the SXEP (European Oil & Gas Stocks) and sell rallies
In 1985, the Saudis chose volume over price to defend their market share against new production from the North Sea, as well as cheating/discounting from other OPEC members in a period of weak demand. With Iraqi exports ramping up, in spite of the war with Iran, the Saudis went around the world signing netback deals, which incentivized refiners to buy/produce as much product as possible…the market was oversupplied and the price of oil fell from $31.72/bbl in November 1985 to $10.42/bbl at the end of March 1986. A fall of 69% in four months!
The Saudis had warned the world of their intentions, but many thought “it was merely an elaborate warning designed to scare other OPEC countries and restore discipline.”
See the chart below – the price remained volatile through 1986 and then saw a sustained recovery with the implementation of an OPEC quota system that members actually upheld until 1989. Interestingly, the agreement in 1986 also included cuts from non-OPEC members Mexico, Norway, and the Soviet Union.
In 1985-86, the Saudis gave the market “a good sweating”…WTI fell more than 69% in four months!
