As Saudi Arabia struggles with an oversupply of cheap oil and squabbles with its neighbors, one Wall Street analyst has a simple suggestion for the kingdom: how about hedging?
The oil market is heading for a supply crunch in the next two or three years, RBC Capital Markets strategist Michael Tran argues in a research note that was circulated to investors on Tuesday morning. That may put Saudi Arabia in a position where it could increase its market share without necessarily making major adjustments to its output numbers.
By trading over-the counter derivatives such as fixed-price swaps and put and call options, the Saudis could be able to keep perpetual downward pressure on the term price of oil - the cost of future delivery of a barrel, Tran wrote, blocking long-cycle projects in the process.
Long-cycle global projects like deep-water oil extraction off the coast of Brazil and oil sands processing in Canada generally need higher term oil prices to economically justify their high overhead costs and lengthy development time frames.
"The majority of global long-lead time projects won't ever be commissioned [in this scenario]," Tran said in a phone interview.
The kingdom would simultaneously profit from gains in the spot price of oil -the cost of immediate delivery of a barrel -, thanks to its immense supply of proven oil reserves.
"OPEC producers [like Saudi Arabia] generally sell on a spot basis," Tran said. "Which means if you're a low-cost producer, you can sell products at a higher spot basis."