The Saudi War on U.S. Oil

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.

Per Tully:

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?

Tell me what you think by leaving me a comment on our website or by sending me an e-mail.

***

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,

Brad Hoppmann

Publisher

Uncommon Wisdom Daily

Your thoughts on “The Saudi War on U.S. Oil”

  1. We should exit the global oil market
    and stop buying OPEC oil, the proceeds from which fund international terrorism. I’m willing to pay whatever price for gas makes energy independance for the US financially viable, and we have the oil reserves to do this for the forseeable future .
    I’m really tired of the US funding both sides of the war on terrorism.

  2. I hate tariffs, but I believe for the purpose of National Defense this is reasonable in this case. Setting up a structure in the US to insure that marginal shale production remains profitable would keep US business from going bankrupt. The Saudi’s cannot produce below production costs forever and as you have stated, the effect on other producers may force a change in policy earlier.

    1. Saudi’s have wells that can produce at $5-$10 a barrel. For them its not about unprofitable production as it is about how profitable it will be. However, they are hurting their own budgets and those of their neighbors.

  3. Brad,

    I think looking at this as a big “middle finger” to the US producers is overly simplistic. There are other factors at play:

    1. The Russians can’t produce a barrel of oil for less than about $75/barrel. This slowly strangles Putin and his friends. Taking money out of Putin’s hands? A good thing.
    2. The Saudi oil stocks are taking a beating, as are Saudi stocks as whole. Discontent in Saudi Arabia is not something to be fostered, given the current geopolitical environment. At some point they will have to turn off the spigot.
    3. ISIS is starving at $37/barrel. Funding terrorism is expensive. This means they have to look elsewhere for “contributions.” If the oil rich states are hurting and handing out money is being constrained, is that bad?
    4.The Saudi’s could also be using oil to try and stimulate consumption. On top of a glut of oil is also lowering or flat demand in most countries. At some point, our consumerism will kick in and those 40 MPG cars get replaced with 25 MPG SUV’s. We tend to lose long term focus as Americans.
    5.The strong dollar is hurting US oil as well. While it looks like Goldman Sachs prediction of a Euro/Dollar parity isn’t going to happen by year end, buying overseas oil, or anything else is still going on and it hurts American production.
    6.The Saudi’s cash burn is about $10 billion a month right now. How long do they want to do this? Slight correction to your number; Saudi reserves stand at about $625 billion. and that is with bonds being issued for the first time in about 8 years a few months ago.

    I will concede that our current prolific ability to mismanage Middle Eastern affairs would give OPEC a good reason to raise the finger. But I think there is more than the obvious at work.

    Of course the idiots on the Hill are SELLING strategic oil reserves for the next 10 years rather than buying at rock bottom prices in a vain attempt to look responsible with the budget. If you want to run a deficit, feel free to buy oil at $35/barrel and hold it for a while. This rubber band will snap back with a vengeance some day.

  4. My portfolio is now in a ” damage control mode” from investing too heavily in this sector.
    However, while it may cause some consolidation, the US is unlikely to lose this battle.

    The Saudis cannot play this game forever and what we now see is a knee-jerk reaction.
    Expect that over a period of time, with US consolidations and the Saudis looking at total revenue ( which they need to run the country)…that we should see a gradual climb out from the heavy discounting.

    Obviously optimistic

  5. The Saudis are in an extremely vulnerable position if the United States decides to use its economic power to bring the Saudis to their knees. The Saudi economy is based on one thing, oil. The US economy is incredibly diverse with the oil industry in our country comprising
    a comparatively minor segment of our economy. The lower price of oil is pumping $300 to $400 billion per year into the pockets of consumers and industries outside of the oil industry. This is much more of a monetary stimulus than even the FED is able to provide.
    A portion of that $300 to $400 billion per year can be channeled back into incentives for our oil industry to continue pumping more and more shale oil and dumping it on the world market driving the price of oil lower and lower.
    The lower the price of oil per barrel, the greater boon to our consumers and industries outside of the oil industry and the more could he channeled back to our oil industry to enable them to pump even more oil and drive the price if oil even lower. We need to insure that our country achieves energy independence
    and not be intimidated by Saudi Arabia or by any one else economically or strategically. Under this scenario the Saudis will capitulate in short order as otherwise their economy will be driven into the poorhouse in about two to three years as their cash reserves of about $750 billion would be depleted in that time period with the price per barrel for oil significantly lower than it is today.

  6. To: Brad Hoppmann
    Re: The Saudi battle strategy is basically to starve U.S. oil producers, send them out of business – there is also the goal to assure that Iran makes the least amount possible on the huge inventories they will hit the market with in the coming months and Saudi goal to minimize that windfall for their enemy.

    On a positive note we will reap the benefits of lower energy for the foreseeable future while conserving our domestic resource. Domestic producers will suffer the most. In the long term a new price cap has been established knowing that the proven tight oil can be turned on again when the price allows.

    Some means to keep a minimum production going in order to retain the skillset and talent on hand should be considered (perhaps, financial subsidies for natural gas for domestic electric production but disallowed for gas exported – taxpayers benefit from the taxpayer paid subsidies to produce gas for taxpayer use only). This could also lead to additional extraction technology and production improvement.

  7. It’s apparent the Saudis can give a hoot about sharing the market with the rest of the world, I think the us should play hard ball with them and just use our oil and gas to supply our country. We have more than enough to do so, after a few years their economy will go bankrupt and then maybe they’ll stop being so greedy? Down with Saudi Arabia !

  8. Put import Tariff on Saudi Arabia Oil to USA. Bring Saudi Arabia Oil to $60 when entering USA!

  9. OK, question: Does the U.S. still buy crude from the Saudis? If so, who’s the “DUMMY”? Why don’t we just use our domestic production which would keep the rigs running and provide a lot of jobs. STOP buying the middle east oil. They only have so many storage containers, so when they are full, they’ll have to back off with production.

  10. Saudi Arabia has declared war the USA oil producers which means they have declared war on the USA. We should not reward them with oil contracts at the prices they have driven oil down to. $50-$60 a barrel for oil is reasonable worldwide and especially in the USA. We either should ban Saudi oil outright or place a tariff on it to equal $60. That would serve two purposes: first it would provide the treasury with a substantial revenue stream from foreign oil as they get from USA oil royalties. Second it will provide a base that allows USA oil production and exploration to continue so that we might reach self sustaining production.
    There may be multi-nation treaties against these types of tariffs. However, I think the US would prevail in the World Court because this is dumping huge supplies to drive competition out of business. We can not allow this to continue! War has been declared on us. Its time to act!

  11. Since when is it a bad thing when the price of oil drops? I’m old enough–and you don’t have to be THAT old–to remember when OPEC caught hell for cutting production to force prices up. People want tariffs? Really? If prices are low can’t these US oil companies mothball their wells until prices rise? And if prices don’t go back up, well, that’s a good thing for all Americans but the oil companies and people who work in the oil industry. The rest of us gain by spending less on gas at the pump, which puts more money in our pockets to stimulate the economy. And lower prices mean less of our money goes into the pockets of the OPEC oil barons. How can that be bad?

    1. I agree Broomy,
      I remember prices at 22-25 cents a gallon and it seemed everyone had a job some were pumping the gas and cleaning your car. On a fill up they’d give you free drinking glasses or dishes. I believe someone or some group (s) don’t want money in our pockets to stimulate the economy. I think it’s about putting everyone under government control.

  12. Let opec drive down the prices so that we Americans can use up their Oil at record low prices and the American Oil companies can save their Oil and when opec dries up, we will still have our Oils reserved and we won’t sell to them!

  13. I think you have missed another pertinent reason for Saudi Arabia to keep the oil price low. The Russians, whose economy depends on oil revenue, are supporting Iran, a true enemy of the Sunni Saudis. Limiting Russian income would limit Russian adventurism in Syria and Iraq and limit Iranian influence there.

  14. Why are we protecting the Saudis from ISIL. Let them protect their own oil and fight their own war.

  15. Saudi & China both have tremendous Solar and Wind Power fields. This Paris conference on climate, is really a clan of 350 Billionaires who fully intend to own and control the Green Energy Market. I have a climate report that I would be happy to forward. The climate is not as politically described.
    This Roundtable of Greed is feeling the pain of their “Oil Barge Storage Game” which backfired. Now they are yelling “No Fracking.”
    American Oil Companies need to serve the American people, and excess should be sent to Mexico, where Canada was routing their pipeline.
    I say, “OPEC is in the middle of a war plagued, production zone and political chaos, topped by a trade bill that will cause massive migration.”
    I have the UN report on “Required Migration” and would be happy to forward same.
    Connect the dots: TPP = Corporate Lawsuits waged on those who break the “Corporate requirements of the TPP. Migration means poor desperate people, willing to work dirt cheap. The TPP has guaranteed workforce around the globe. Add this to the top 350 elite going after Solar, Wind,and now Water. Top that with denying America use of it’s own resources.
    We need to teach people to find and share the TRUTH.
    America could produce all of the oil we need and then some. We aren’t importing American Oil across the world, so why should it cost what Saudi’s oil costs?
    Alaska did the right thing, her they shared oil revenues with the state’s citizens. They don’t have a panicked market.

  16. Brad, Saudi Arabia is NOT just flexing it’s oil muscles against the USA but Russia as well as Chuck explains above. This is ALL about the Global Elites focusing on the one world/new world order. Right now, the Western Global Elites are aligned with the Sunnis and the Eastern Global Elites are aligned with the Shiites. This is a VERY incendiary and ominous situation that continues to grow worse as the Eastern Elites (aka BRIC countries) do NOT want to be subjugated to Anglo Western Elitism..This is why we have the Neo-Con strategy of Destabilizing the Middle East, Going after Syria, the Ukraine Orange Revolution etc..etc..NOBODY is fooled by all the deceit and deception, false flags, Black Ops etc..etc. going on world wide..God Help the global middle class!!

  17. John D. Rockefeller wiped out competitors using this method.
    He even sold oil at a loss to accomplish his goals.
    I seriously doubt if any oil is now produced by ‘fracking’ as it costs about $60.00 per
    barrel to recover it from the ground.
    Exdpect the Saudi’s to contimue this for at least another year.
    By then, ‘Shale oil’ will be a distant memory.
    It’s not unlikely the US will soon step in to stop this ‘unfair’ dumping!

  18. This is less than half the story. Facts are distorted and wording slanted. The other half of the story is that the USA has assisted in this effort to drive down the price of oil down to buy time for economic growth to allow the interest rates to get off the floor. There are other reasons for this USA action, but I won’t take the time to go into it. Needless to say, both political parties are supporting keeping the price of oil below $60 per barrel. Please do not believe that OPEC is always bad and the we are always good.

  19. The OPEC did this before about 15-20 years ago. They want to destroy all alternative energy too. All solar energy, shell oil, etc. will shut down within a few years. Then after that they will cut back their production and the oils will go up to > $ 100/barrels. This is the old songs.

  20. It is sad that the Saudi’s can declare war on the US producers and we sit and take it with no action. When the Chinese and Korea dump steel we impose tariffs, but oil is a political landmine in this country so no action will be taken. The old policies on middle east don’t make sense with new production and a shift to alternate fuels. Other thoughts:
    a) Much of the US economic recovery was from jobs created with fracking.
    b) Trade deficits declined as oil imports dropped.
    c) Lower fuel cost are partially offset by layoffs in the oil industry.
    d) We will lose in the end from inaction and prices will be back up when our sources die.

  21. Is the current oil supply/demand situation the definition of “creative destruction?” This is the free market at its best. This IS how we, as free marketers, say the market is supposed to work. There will be winners and losers in this game but in the longer run, barring any irrational governmental interference, we will end up with oil prices where they belong in a competitive marketplace.

    The two major factors in oil pricing are cost of production and demand. The first of these, cost of production, can only be ignored short term. The Saudis cannot sustain their current pricing policies indefinitely. Their current pricing strategy may drive some higher cost producers out of business in the short term but we have already seen technological improvements in oil extraction that will still be available when the Saudis can no longer sustain these artificially low prices.

    The second factor, demand, while somewhat soft due to slowing global growth, will respond to these artificially low oil prices. Demand will grow organically and as global growth oscillates back to a positive direction the aggregate demand for oil will grow with it. This will result in oil prices stabilizing (as much as this commodity can) at prices higher than today but lower than the hundred dollar pricing we have seen in the recent past. Carpe diem.

  22. it’s all just the super-consolidation of oil under the rothschildl/rockefeller umbrella
    it is only meant to appear as something else – like opposing sides
    we in the US fall for this constantly, because we can no longer read and are too lazy
    this will be followed by the socialism the world’s disgusting powers – UN – want
    then they can price it any way they like
    saudis helped these guys every possible way for decades, including now with ISIS
    stop shilling for the oil companies

  23. USA and Allies, if we have any,, NEED TO TELL OPEC WE WILL REMOVE OUR NUCLEAR COVER AND AGREEMENT TO DEFEND THEM IF THEY DONT LOWER PRODUCTION TO 75 DOLLAR OIL. (Plus cost to provide Nuclear Cover and defense!!!!!)
    SECOND PAY FOR OUR EFFORTS IN THE WAR AGAINST ISIL IN SERIA AND IRAQ AND SEND THEIR TROOPS TO DESTROY ISIL.
    CONGRESS WOULD HAVE TO DO THIS AS OUR PRES WILL NOT.
    ELECT TRUMP.

  24. Continue producing sufficient US/Canadian oil to cause SA to follow their current strategy, even if the US Government must subsidize this production, but do not produce 1 barrel more. Save our reserves while we eventually run theirs out no matter how many years it takes for them to realize that they can no longer control the free market price of oil.

  25. Your readers have some interesting ideas. Super article by you,
    I only hope those in places of power read it too.

  26. This is terrible news for North American oil producers whose business model is based on $60+ crude. Worse news for those without a lot of cash, and worst for those carrying a lot of debt. Unfortunately the latter describes a lot of companies that ramped up to take advantage of $100 oil.

    Obviously this is what Saudi Arabia wants their strategy to achieve.

    But in the long run it won’t be a winner for them. The world should buy all the oil OPEC can stomach selling below their cost of production. When their enthusiasm wanes, North America will still have lots of shale oil.

Comments are closed.

Brad Hoppmann originally grew up in Florida, but has lived in Baltimore, Charlotte and New York as well throughout his career. Always an athlete, he played varsity football and water polo at the University of Florida and received All-SEC/SCC honors.