In a move that took many traders by surprise, the nation cut its asking price for its oil being shipped to the U.S. The move was likely motivated by the need to defend market share, indicating the Saudis are trying to boost U.S. demand for its oil. It may also suggest more pricing flexibility in the near future as the Saudis wrestle with oil stuck in a downward market, at three-year lows despite long-term fundamental support.
The recent 25% slide in crude oil prices has been quick and sharp, painting Monday's move by the Saudis as opportunistic in a weaker price environment. According to Goldman Sachs, "every 10% drop in oil prices spurs 0.15 percent more consumption in the global economy. That consumption sets up additional demand of almost 500,000 barrels of oil a day."
In that light, the Saudi price cut could actually be seen as a strategic move to support longer-term stronger oil prices. That would be especially effective if warnings of a supply glut in the U.S. turn out to be premature.
Let's not forget the Saudis raised prices in Asia, where they cut pricing four months in a row. Asia didn't have the shale revolution the U.S. did, so the competitive need for low prices doesn't exist. This focus on supply and demand makes the possibility of a price war between the Saudis and the U.S. less of a real concern.
At the same time, the U.S. still imports roughly 7 million barrels of crude oil per day. So despite the growing affinity for renewables, fossil fuels will likely be a big part of our energy mix for the foreseeable future. Given that, U.S. domestic oil producers have already shown a willingness for capex reductions, which could easily result in a drop in production. That could lift crude oil prices comfortably above $80 per barrel before year-end and make beaten-down exploration and production names like Chevron (CVX) , Hess (HES) and Statoil (STO) attractive again.
That scenario is increasingly likely if we understand that Saudis are focused on long-term pricing and not crippling shale producers.