‘The market is expecting Saudi Arabia to pullback’, admits Seth Kleinman, ‘but we do not see any indication that this is about to happen… while geopolitical considerations play a part in Saudi deliberations, the most plausible interpretation of Saudi motivations is that they think that they can win any price war given shale's full cycle production costs of considerably more than Saudi's ~$4/bbl… this assessment is accurate, but only so far... $80/bbl
WTI may represent the upper end of US shale production costs but half-cycle costs are what count at this stage, and they are significantly lower and can continue to fall… even if such a price war were ensuing, the Saudis would end up punishing themselves – they could sustain the pain of $60/bbl oil for a while, but definitely not forever.
