Wednesday, January 14, 2015

Calling Saudi Arabia's Oil Bluff

Saudi Oil Minister Ali al-Naimi keeps telling us that the world's top petroleum exporter is not going to cut production to prop up global oil markets: "We are not going to cut - If they (non-OPEC) want to cut production, they are welcome." 

“It is not in the interest of OPEC producers to cut their production, whatever the price is,” he recently told the weekly newsletter Middle East Economic Survey. “Whether it goes down to $20, $40, $50, $60, it is irrelevant.”

As in the ultimate bluffing game, Liar's Dice, Ali al-Naimi is looking into the eyes of his opponents - from the deepwater drillers off the coast of South America and Western Africa to the unconventional (shale) U.S. producers - and making such claims with arrant confidence. 

Though it's true that Saudi Arabia and other Gulf oil producers enjoy significant advantages in crude oil extraction - production costs of only $5 - $10 a barrel - contrary to accepted thinking - the monarchies in the Middle East cannot withstand long periods of persistently low crude prices.

With youthful unemployment rates ranging from 22% - 40% in the under 25-set, Saudi Arabia, Qatar, Kuwait and their oil neighbors maintain political order in their respective kingdoms only through "cradle-to-grave" social welfare programs.

In 2013, oil accounted for roughly 90 percent of Saudi Arabia's overall budget income and Kuwait at 92 percent, according to Reuters' calculations based on official data.

As suggested in this Jeffries fiscal spending chart, such largesse is unsustainable. Ergo, as in the dice game, it's time for U.S. producers to challenge the putative supremacy of the Saudis by calling their bluff: "liar!"


The Dumb Money said...

Nice sentiment, but easier said then done. US producers are cutting and will cut rig count, are shifting and will shift rigs to better locations, and eventually production increases will reverse due to less present investment, then production will fall, and many weaker players will get bought out, either before or after bankruptcy. These companies answer to shareholders, not the President, and not a King.

In the meantime, Venezuela will default, Iran will likely capitulate on nukes, Russia will do something else crazy to take its populace's focus away from its economy (possibly invade a Balkan NATO member).

The Saudis will keep just using their $750 billion in currency reserves to fund their budget, which they can do for something like 5-7 years if they want to, without ever having to cut social services for their own population.

Winners: Saudi Arabia, worldwide gas consumers (for 1-4 yrs, then they become losers), oil and gas majors who buy weaker players in a time of turmoil.

Losers: Venezuela, Iran, Russia, many leveraged shale companies in the US, the states of Texas, North Dakota, and Pennsylvania, the Balkans, "high yield" creditors of leveraged fracking companies.

zbest1966 said...

Well said, you forgot one Nigeria. Will this cause another recession, Shale oil credit swap or investment are worth 220 billions this may lead to financial meltdown