Sunday, May 22, 2016

US’s Strategy on Oil Price

In geo-political aspect, strategy is all about who you partner with.

Before 2014, US was the largest importer of crude oil and had very good relationship with Saudi Arabia. In the middle of 2014, the Fed started quitting QE program it initiated in Dec 2008. The dollar index kept increasing from 80 to a high of about 100. In the meantime, for the sake of lower energy price and sanction on Russia, US increased the field production of crude oil in the fastest pace in the past 100 years. As a result, the oil price has fallen to around $50 to $60 per barrel.

The low oil price did not crush Russia’s economy, but hurt the relationship with Saudi Arabia. In the first quarter of this year, the market has seen many signals of slowdown of economy growth. Low oil price might be good but when it’s too low? Most of the US shale oil companies are producing at a cost of above $40/barrel. CPI might not be good because of the low import price of raw materials. Therefore, there is intention for the Fed to weaken the dollar and hold the oil price.

However, Saudi Arabia is producing at the cost of only $10/barrel and has created an aggressive plan to be less dependent on oil exportation. The broken relationship leaves Saudi no intention to corporate in the Doha meeting. Keeping the oil price around $40 is not only still profitable but could potentially lead more US competitors to Chapter 11.

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