There’s a war going on between Saudi Arabia and the United States. But this war has nothing to do with armies charging through the deserts of the Levant.
This war is all about crushing U.S. oil producers — driving them out of business and making the world safe for the Saudi-led cartel known as the Organization of Petroleum Exporting Countries, or simply OPEC.
The latest salvo in this petrol jihad came last Friday in Vienna, as OPEC held its semi-annual meeting. At that meeting, the cartel decided not to cut oil production.
Instead, it effectively increased production to some 31.5 million barrels per day.
Since that Friday decision, the price of crude oil has been in freefall.
West Texas Intermediate crude prices tanked 5.8% to below $38 per barrel on Monday — their worst level since the Great Recession lows of 2009.
Oil continued its tumble early Tuesday, with WTI crude falling to $36.64 a barrel before a slight rebound above $37 took place midday. Still, oil was down another 6.25% midway through the session.
As one oil analyst put it, this is "OPEC’s middle finger to the oil markets."
In his piece at the Oilprice.com, Andy Tully writes that OPEC’s decision:
… to legitimize its overproduction shows that the group is determined at any cost to recover the market share it lost to producers outside the cartel, particularly those drilling for oil in the United States.
Now, it’s no secret that ever since the U.S. oil producers became big players in the global crude scene, OPEC has been running scared, and for good reason.
As Tully writes:
Traditionally, OPEC members have produced about 40 percent of the world’s crude oil, but 18 months ago prodigious U.S. production began to eat into its market share.
Thanks to new technologies for extracting shale oil, the U.S. essentially became the new "swing producer" on the global production stage. Prior to the U.S. emergence, the Saudis were the key swing producer.
As for oil prices, the new reality is that the U.S. production gains have led to a global oil glut that’s caused prices to plunge from a high of more than $110 per barrel beginning in June 2014 to the aforementioned sub-$38 mark of today.
Tully goes on to explain that the Saudis have made no secret about their war on U.S. oil producers, a move highlighted in Vienna by Saudi Oil Minister Ali al-Naimi.
Al-Naimi said his goal in refusing to cut production was to drive the U.S. drillers out of business. They had been relying increasingly on expensive hydraulic fracturing, or fracking, which isn’t profitable unless the average global price of oil is about $60 per barrel. So far that strategy has worked, as rig counts in the United States have fallen substantially.
The Saudi battle strategy is basically to starve U.S. oil producers, send them out of business, and clear the deck for OPEC.
Certainly the Saudis can sit back and afford to keep oil prices down, especially considering the Kingdom has monetary reserves totaling somewhere around $750 billion.
Yet as Tully points out, not all OPEC nations have the bankroll to keep taking big losses from rock-bottom oil prices. For example, Venezuela is one nation that’s seen its economy get slammed by the oil’s plight.
According to Tully:
… eventually even Saudi Arabia began to feel financial pressure and was forced to revise the projected budget revenues. Even the stock markets of Gulf States were affected: On Oct. 30, the U.S. financial services company Standard & Poor’s cut its rating of the Saudi sovereign debt.
Yet despite the negatives for the Saudis and other OPEC members, don’t look for a change in strategy. The Saudis are likely going to take this strategy much further into the late innings, and that is going to continue having a big impact on oil prices well into 2016.
The bottom line here is that the "new normal" for oil prices will be continued pressure from a global supply glut teamed up with lackluster global oil demand.
Until one of these two sides of the economic equation change, oil prices will likely continue sloshing around multi-year lows.
What, if anything, can we do about the Saudi war on U.S. oil producers? Should we be concentrating on positive byproducts such as lower gasoline prices? Or, should we be worried about the decline in energy and related stocks, and the impact on the major U.S. stock indexes?
Stocks sold off for a second-consecutive session as oil tumbled to a seven-year low. The S&P 500 shed 0.5%
• Morgan Stanley (MS) is rumored to be cutting 25% of the jobs in its fixed income and commodities division. This includes closing its base metals trading desks, which deal in copper, aluminum, nickel and other non-precious metals. The roughly 1,200 job cuts globally should result in about $150 million in severance pay in Q4.
• Smith & Wesson’s (SWHC) gun sales rose 15.2% to $124.9 million in the past quarter. The stock surged 4.6% today after the company reported that earnings shot up 35% year-over-year. Shares are up more than 125% year-to-date.
• No LUV for Southwest Airlines (LUV). Shares fell 9% in today’s trade after the company reported good earnings but said it expects revenue to be flat in Q4 because of lower airfares.
Good Luck and Happy Investing,
Uncommon Wisdom Daily