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Kilduff: Will Saudis Buck or Back OPEC?

Energy prices gave up the proverbial ghost this week, as the collective factors that combined to produce $147 per barrel of crude oil in July continue their unravel. I am, of course, referring to the strengthening dollar and concerns over the global economic outlook, among other factors, weighing on demand for crude oil and refined products, such as gasoline. However, taking center stage, at the moment, is OPEC’s meeting in Vienna, and their decision, considered or otherwise, about a possible cut in production.

Obviously, this meeting and the discourse surrounding it was and is meant to bolster, or at least stem, the dramatic decline in oil prices that producers are experiencing with the same alarm of investors in all asset classes across all markets. While some of the rhetoric has been predictable, especially from the hawkish wing of the cartel, punctuated by calls from Iran and others for a production cut upwards of three million barrels per day, some of the rhetoric has represented classic OPEC missteps coupled with a notable lack of commentary from Saudi Arabia, until today.

In terms of the misstep, OPEC President Khalib Cheliel might have thought he was talking his book, earlier in the week, when he stated that “some oil tankers are going without buyers,” in arguing for and justifying a robust production cut, even in the current financial climate, where every bit of stimulus and price relief seems to be needed to stabilize the global economy.

Instead, his comments seemed to startle the energy market. The rapid conclusion over his remarks was that global crude inventories may be backing up or increasing much more rapidly than previously thought. The OPEC President made his case for oversupply, alright, and traders headed for the exits, enabling prices to breakdown below $70 per barrel. You could say “that one” oversold his case.

Saudi Arabia’s main comment, so far, is that “markets determine the price.” They appear to be trying to counsel their fellow members not to act too aggressively in the face of falling prices, recognizing the benefit of lower energy prices to the global economy, which, of course, is where much of their sovereign wealth is invested. Probably more than any other member, along with Kuwait and the UAE, they are in this financial debacle with rest of us. Among their most notable investments is their outsized stake in shares of Citigroup, among other brand name equities.

I think it is an open question as to how pleased or displeased Saudi Arabia has become over the past several years with the petrodollar fueled flights of diplomatic fancy of certain producers. Iran’s pursuit of nuclear weapons technology, Venezuela’s push to become a hemispheric counterweight to the United States, and even non-OPEC Russia’s actions, relating to its renewed place in the world, have all occurred thanks solely to the rush of increased currency reserves from high priced oil and natural gas sales. Actions, which if examined rationally, have the look of biting the hand that feeds you.

Saudi Arabia has the institutional memory of the classic boom and bust cycles of energy prices. The bust in prices in the late 1990s was a large factor in bringing down the former Soviet Union; it precipitated the rise of Hugo Chavez in Venezuela; and it gave a great many of us concern over the viability of the House of Saud. To that point, Saudi Arabia, in my estimation, can endure sub-$50 oil, at least for at time. I am not as sure about the rest of the group, however. Venezuela and Iran will be the first to stare down real economic hardship and quickly. Venezuela has largely squandered its oil riches on domestic social programs and largesse to foreign nation. Iran will quickly see just how effective those increasing United Nation sanctions are without the riches afforded by triple-digit oil prices.

Tomorrow, the final decision will likely be a mere 1 million barrel per day production cut, with another meeting planned soon, with more cuts promised, “If needed.”

I will be watching to see, however, the posture of Saudi Arabia. They will likely not come right out and say it, but they may be more with the West than their producing brethren may realize. They saw the pushback on the alternative energy front and the US driving public to the exorbitant prices. The accoutrements of triple-digit oil did not seem to seduce them, this time around, the way it did other producing nations. It will be interesting to see if they take this opportunity to teach their cohorts a valuable lesson about business cycles, and demonstrate their experience with the ability to afford and endure the lesson.

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John Kilduff
John Kilduff

John P. Kilduff Senior Vice President Of Energy at MF Global Ltd. He's also a CNBC contributor.