Great Graphic: Saudi Arabia's Masterful Stroke

The December Brent oil futures contract settled at $86.16 before the weekend, after having fallen to a four-year low on October 16 just below $83.00. 

It has lost more than 27% since the end of June, and more than half of that has taken place this month.  Technically, the October 16 low looks to be important.  Prices reversed higher, and left a bullish divergence in its wake.  The retracement objectives of this month's slide suggests initial potential toward $88.20, and then $90.65

It has become clearer in recent days that,while the price momentum has taken on a life of its own,  the key fundamental that it driving the decline has been shift from price maintenance to competition for market share by Saudi Arabia.  It is a bold move.  It has all the markings of a grand strategy.  With a single stroke it is able to deal a blow to several of its adversaries. 

Some conspiracy theorists assert that the Saudi's are doing the US bidding.  One need not posit this to explain the Saudi's move.  The aggressive act toward Russia is not to do the US or Europe any favor, but rather grows out of Saudi Arabia's national interest.  It wants to end the Assad regime in Syria that Russia has supported.  As a non-OPEC producer of oil and gas, there is a natural competition, that has been underscored by Russia's attempt to seek other market outside of Europe.  

Iran is another adversary that will be hurt by the drop in oil prices.  Saudi Arabia could be threatened by a nuclear-armed Iran.  Some of the conflicts in the Middle East appear to be between Saudi Arabia and Iran.  This Great Graphic, tweeted by Ian Tally, that initially appeared in the Wall Street Journal, shows in terms of budget positions, who in OPEC is most impacted, by the drop in oil prices.   Iran tops the list. 

US oil and gas production has soared, and this adds further disrupts global supply patterns.  For example, Nigeria used to be one of the top five suppliers to the US.  The US has not imported any oil from Nigeria for months, diverting its supply elsewhere.  The decline in oil prices is the shale industry's first real challenge.  It is likely to inject some caution about expanding capacity, which could see orders and investment slow.  The sanctions on Russia and the drop in oil prices have dragged down US share and bond prices in the energy sector, even before the recent dive. 

What does Russia, Iran, US shale producers have in common?  The need of high oil prices.  Depending on how long oil prices stay near $80 a barrel, it could cost Saudi Arabia $10-$20 bln, according to some estimates, which can be easily absorbed.  It has huge reserves.  Other non-OPEC oil producers will also be adversely impacted.    Non-OPEC output and divergent political interests have altered Saudi Arabia's tactics.