Rosenkranz Remarks

The Blog of Robert Rosenkranz

The Futures Market: It Suits The Saudis Fine

by robertrosenkranz on February 9, 2015

Meghan O’Sullivan was a co-panelist of mine at last summer’s Aspen Strategy Group symposium; she is extremely knowledgeable, and her judgments are astute, especially in her recent column “Why Saudis Are Holding Strong On Oil.”

In this case, I would argue, there is another reason why Saudis will stay the course on oil prices: the strip.

The “strip” is oil trader jargon for the price of oil delivered in the future.

Oil can be bought or sold for delivery a year from now for $62 a barrel, up from $53 today. If the futures market is correct, the mere passage of time will improve Saudi economics and there is no reason for them to relax the pressures on their regional rivals.

I do believe the futures market has it right–there is apt to be significantly diminished supply in the future because oil drilling activity is being cut 30 to 50 percent and because production from shale wells declines far more rapidly than from conventional wells.  Lower supply spells a higher price.

This strip is not a tease.

See also: my latest piece on oil prices for The Huffington Post.

robertrosenkranzThe Futures Market: It Suits The Saudis Fine