$70 Oil - The Saudi Goldilocks Price Point - Not Too Hot and Not Too Cold

It's abundantly clear that the Saudi's still wield significant influence over global oil pricing as they've persevered with their disciplined production cuts resulting in the oil price recovery as achieved over the past few months. So we are now at $70 bbl (Brent) - which I purport is the unspoken target price - the Goldilock's price - that enables the Saudi's to diversify their economy in accordance with the "2030 Vision" without risk of derailing it.

$70 is the magic number for the Saudi government to balance its budget given its massive social subsidies. At $70 the Saudi's can fund both their economic diversification projects and support their social subsidies, which most importantly buys them time to carefully unwind decades of unsustainable social, religious and government norms.

Can't let the market get too hot - if Brent continues to climb above $70 than large CAPEX projects will be incentivized and the race will be on again with drilling projects in offshore (deepwater), the Canadian Oil Sands and even moving into the Artic. Maintaining that delicate balance - not to hot and not to cold - is likely the key driver in Saudi energy policy - as much effort has gone into attaining the delicate balance now achieved.

This delicate balance factors in both capital and operating costs in which the Saudis dominate. Unfortunately, the social subsidies are what holds the Saudis over a barrel and put them on par with shale. The Saudis need $70 oil to balance their budget and the shale producers want $70 oil to make a lot of money. Going above $70 Brent risks overheating the market and jeopardizing the hard won price stability that we are now enjoying. And as we are seeing this week, holding the line at $70 is proving difficult as shale producers ramp up production.

In the chart below I've highlighted the highly competitive operating costs for shale. Shale operating costs are the biggest competitive threat to the Saudi energy policy and will likely keep a lid on global pricing. During 2018 perhaps we will see a battle to maintain $70 Brent - a kind of tug of war between OPEC and the shale producers. The spread between Brent and WTI is already shrinking as the shale producers heat up the market. The Saudis are having to walk a tight rope - how to maintain $70 Brent in such a volatile market. For more perspective on Saudi energy policy and how they will manage through these market challenges click on the article below.

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Peter Armstrong is a Principal with Armstrong Marketing Strategies, a B2B “sales results oriented” marketing and business development consultancy and services firm. Our services are offered on a fractional CMO or BD Executive basis or by project. We specialize in inbound marketing / marketing automation (either as an internally supported or outsourced solution) and formulating distinctive go-to-market strategies. Expertise spans branding, messaging, market research, web development, product marketing, new product development, trade show execution, sales force optimization, and solution selling sales training.

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