In baseball terminology, a “suicide squeeze” is a play in which the runner on third base breaks for home plate on the pitch, counting on the batter to lay down a bunt. If he doesn’t, the runner is an easy out.
On December 4th, at the regular annual meeting of the thirteen members of the OPEC cartel, the “suicide squeeze” will be in play. And they will find, to their chagrin, that the batter didn’t cooperate.
A year ago Saudi Arabia, the head of OPEC, made a fateful decision, based on incomplete information, to flood the world with crude oil, drop its price below breakeven for the Americans, and then return to regular programming.
But the Americans failed to cooperate. The fracking industry in the United States has grown up. It has been planning for December 4 for at least the last 12 months. It has laid off an estimated 200,000 workers and idled half of its rigs, and yet its production remains within a few hundred thousand barrels per day of its all-time high. It has figured out how to drop its breakeven point so that even at $40 a barrel, the industry remains profitable. So profitable in fact that it has continued to develop fields and then wait to bring them online until the price is right – rather like putting inventory into storage and waiting until Christmas.
In order to play OPEC’s game, the members have to have staying power. Most of them don’t, and the screams from Algeria and Venezuela have become more shrill and strident with each passing month. Even Saudi Arabia, with its massive foreign currency reserves, has become increasingly concerned that it can’t outlast the Americans.
And so the meeting on December 4 for the OPEC cartel is increasingly crucial. Algeria needs oil at $88 a barrel, says its prime minister:
The main players in the petroleum market must certainly reach an agreement about the levels of production. If the petroleum market is not controlled, it will witness strong volatility for prices, [which would hurt] the interests of producers and consumers and the whole petroleum industry.
Whose interests, exactly? Despite owning 10 percent of the world’s proven oil reserves and 15 percent of its natural gas reserves, Algeria is broke. With 60 percent of its economy centrally planned, the decline in the price of crude has forced the government to meet its deficits through inflation of its currency, resulting in double-digit unemployment and runaway prices.
For Venezuela the situation is even worse. The Marxist prime minister learned his totalitarian lessons from his predecessor, Hugo Chavez, very well. Half of his government’s revenues come from oil, and the decline in price has forced him to duplicate Algeria’s strategy: inflate the currency. But he has gone one step further. When prices skyrocketed, he put in place price controls, thus guaranteeing shortages of things like toilet paper and other essentials.
This has created unrest that is threatening his regime, which faces reelections on December 6 – two days after the OPEC meeting. He too wants $88 a barrel oil, or higher, if possible.
When Saudi Arabia’s oil ministers announced on Monday that they were now willing to “stabilize” the price of oil, they said:
The council of ministers … stressed the kingdom’s role in achieving the stability of the oil market and its continuous readiness and efforts to cooperate with all OPEC and non-OPEC countries to maintain the stability of the market and prices.
This confirmed recent rumors that Saudi Arabia was going to try to get out of the game without incurring additional damage. In baseball parlance, it was banking on the batter to bunt successfully.
The oil market reacted predictably, ending its long slow and apparently inevitable slide towards new lows, and jumping $3 a barrel as shorts closed out their positions. The spike was aided by the Turks shooting down a Russian aircraft.
But no matter what happens on December 4, OPEC is in a pickle (in baseball parlance, a rundown), happily defined as “a play in which a runner is stranded between two bases, and runs back and forth to try to avoid fielders with the ball.” It’s also called a “hotbox.”
Either way, OPEC is out of options. If they do nothing, prices will continue to drop, putting further financial pressure on the members of the cartel. If they start to restrict supply, prices will rise, inviting American frackers to restart their wells.
That’s why it’s called a “suicide squeeze” or a “hotbox.” For OPEC, there’s no way out. Watch for it on December 4.
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