Saudi Arabia’s leaders are no friends of ours. They’re snakes in sheik’s clothing. And they made that clear last week after they announced that Saudi Arabian oil production will have a daily increase of over half a million barrels.
Saudi Arabian oil production hits all-time high
The timing of this increase makes the Saudis‘ intent crystal clear. They want to cripple North American oil production. Right as the crude market was picking up steam and clearly setting the stage to test the critical $60 per barrel level (near the price many North American producers can survive with) the Saudis made this strategic announcement.
Saudi Arabia is Killing North American Oil
The impact of falling oil prices and increasing production from one of the lowest cost producers in the world,Saudi Arabia, had a disastrous impact on North American energy producers toward the end of 2014. Upwards of 75,000 oil sector workers were laid off in Q1 2015, the majority of which used to work for US and Canadian companies in shale oil or the Alberta oil sands.
What is important to remember about the oil sands is that, although relatively inexpensive to run once operational, the upfront costs to move projects forward can be colossal. Any expansion plans in the oil sands will be delayed indefinitely until oil prices are firmly above $70 per barrel.
What’s more, The US might find itself in the worst predicament of all as extracting shale oil, via fracking, is one of the costliest ways to produce oil. Fracking uses far more water and energy than conventional production methods. Shale producers typically need at least $70 per barrel to break even.
No nation is more acutely aware of these break even numbers than Saudi Arabia. And that’s why, early on in the oil crisis last year, they refused to cut production, despite pleas from the West. As explained in our Weekly Volume from January 11, 2015, the Saudis are petrified of losing US military support; and they realize if America becomes self sufficient with oil, their sovereignty is in danger. Nearly all of the surrounding countries to Saudi Arabia view the Middle Eastern nation as an enemy. Without US military support, the Saudis will be left to the wolves.
However, if the Saudis can depress prices for a prolonged period of time, they’ll garner market share, increase oil exports to the US (because domestic producers can’t make a profit), and ensure their sovereignty.
Declining US Production means Oil Sector Job losses
Let’s review the damage thus far, and look at what the Kingdom might do next to ensure it continues to capture market share.
The US has developed 7 main shale plays in the past decade. This has resulted in the world’s largest economy becoming one of the biggest oil producers.
The US Energy Information Administration forecasted oil production from the Bakken, Eagle Ford, Haynesville, Marcellus, Niobrara, Permian and Utica to produce 5.56 million barrels of crude oil per day in May, compared to 5.62 million barrels per day in April. This is the first decline in 4 years.
It should come as little surprise that there is virtually nowhere to store the excess oil supply in the US right now as inventories explode to record highs. The US experienced a similar extreme oil glut situation in the 1930s, a few years before World War II broke out. The excess supply sent oil’s price crashing roughly 50% in 6 months in 1931 (eerily similar to the 6 month crash we saw in 2014 of more than 50%). The oil glut in the 1930s triggered a meeting of the country’s major oil producers to coordinate how to balance supply and demand in order to prevent such a situation from happening again.
Saudis Executing on Oil Production Plan
We wrote at length about the Saudis plan to attack its North American oil competition and steal market share from OPEC competitors earlier this year in a Weekly Volume titled The Orchestrator of Oil’s Collapse. Below is a short excerpt:
“Saudi Arabia, the largest producer in the OPEC cartel, and the highly distrusted ally of the West, is the driving force behind this oil price collapse.
Ironically, the world’s top oil exporter is intentionally adding momentum to this collapse so it can pick off its enemies and competition, one by one. It’s remarkable to see such geopolitical tactics played by the Saudis, and documents just how scared they are of threats to their kingdom…”
Saudi Arabia is letting the US, Canada and even Russia, the world’s largest producer of oil, know that the supply glut is not over. Not even close.
Saudi Arabia boosted oil production in March by 658,800 barrels to an average of 10.294 million per day – a new all-time record high, according to Bloomberg.
To put this in perspective, in OPEC’s monthly oil market report, released on April 16, 2015, it reported that,“In March, OPEC crude production increased by 0.81 mb/d to average 30.79 mb/d, according to secondary sources. As a result, preliminary data indicates that global oil supply increased by 0.90 mb/d in March to average 94.52 mb/d.”
source: http://www.opec.org/opec_web/static_files_project/media/downloads/public…
OPEC production in March was about 31.5-million barrels a day, an increase of 1.2-million barrels over February and 2-million barrels over March, 2014.
source: http://www.zerohedge.com/news/2015-04-09/saudi-arabia-going-it-why-saudi…
Bloomberg reported that,
“In the space of 31 days, Saudi Arabia managed a production boost that took drillers in North Dakota’s Bakken almost 3 years to achieve…”
The Saudis can flip the switch on incredible oil production whenever they want. This is their weapon of geopolitical warfare, and they’ve been using it, intermittently, for decades.
Saudis boost oil production for Market Share
To defend their bold and destructive tactics, Saudi officials have stated that if they cut production, prices will rise – resulting in a benefit to their competition who, in many cases, are considered rogue nations the West does not support (Venezuela, Iran, Libya etc.)
Furthermore, within OPEC there are high and low cost producers… if the price of oil drops significantly (below $50) and stays there for 9-12 months, OPEC members with some of the lowest cost of production, namely Saudi Arabia, will gain tremendous market share, unless other OPEC members can tolerate losing money every day.
This is one reason OPEC is such a fragmented organization, and why many members despise each other. Over the years, decisions made at OPEC, supposed unanimous ones, have not been honoured (the Saudis have been accused of breaking deals with other OPEC nations for years).
On several occasions in the past, OPEC publicly announced that they agreed to cut production, and that all member nations supported the decision. While that may have been the case at the negotiation table, often times certain member nations flat out lie to each other, and in contract. They’ll unanimously agree to cut production in a bid to boost prices; but then one member nation will actually increase its production behind the others’ backs. It’s often the Saudis engaging in this con. Why? To gain market share.
You see, oil supply contracts are long-term deals, and considered by virtually every nation on earth as a matter of national security. Consider this: When a United States OPEC oil supplier (let’s assume it’s Saudi Arabia) says they can no longer honour their export contract by shipping the country 10 million barrels per day (and they can only do 9 million), the US immediately looks elsewhere to fill that void. And Saudi Arabia’s reputation, and reliability, is now in question from the US government’s perspective. In such an instance, the US will likely be forced to buy from another OPEC nation by agreeing to a long-term supply deal. And it is at that moment when the production cut agreement OPEC made amongst its members falls apart.
That’s a simplified version of how market share is won and lost among OPEC nations.
To properly run a cartel, there has to be trust among members. OPEC is the most fickle cartel in the world, with backstabbing and infighting being the norm. Members are constantly jockeying or lying to each other for a fraction of a percent of global market share.
Just one of many examples of this type of behaviour came last year. Below is an excerpt from an October 2014 Wall Street Journal article:
“Saudi Arabia this week unilaterally lowered the price it charges for crude scheduled for delivery next month-without the typical consultation with other members of the Organization of the Petroleum Exporting Countries, according to OPEC officials.”
Where does Canada fit in?
Among the most negatively impacted oil markets in the world — thanks largely to the Saudis’ shenanigans — is right here in our backyard. Projections are surfacing that Canada’s oil and gas industry will report the biggest drop in profit in more than a decade in Q2 of 2015.
Robert Mark, director of research at MacDougall, MacDougall & MacTier Inc., which oversees about C$5.5 billion ($4.4 billion) in assets, commented in respect to Canadian oil companies that, “This will be a brutal quarter for earnings,” and “They’re bleeding money right now.”
source: http://business.financialpost.com/news/energy/canadian-oil-producers-pro…
Even with oil’s recent rebound to the $56 per barrel range, many major oil and gas companies are still losing money at these levels – and layoffs continue.
Bank of Canada slashed its Q1 economic growth forecast to zero from a January forecast of 1.5%. Needless to say, the key lending rate was left unchanged at 2.75%. Canada’s economy is once again reminded of how directly tied it is to natural resources, specifically the oil sector. When Alberta suffers, so does the entire nation…
US oil market bears brunt of Saudi production boost
Long-time Forbes contributor Christopher Helman wrote about the worsening domestic jobs market for the US oil sector in an updated article this March. His synopsis is that at least 75,000 oil-related jobs globally have been lost thus far, with a heavy emphasis in America. Check out the below excerpt:
“I received a very thorough spreadsheet from some well-placed friends in the industry; it tabulates with more precision than I’ve seen anywhere else which companies have cut jobs, and how many. You can find the full list below. The conclusion: the worldwide oil and gas industry, including oilfield services companies, parts manufacturers and steel pipe makers, has laid off at least 75,000 so far.
Considering that about 600,000 work in the U.S. oil and gas sector, this is a big hit.”
To see a full, itemized list of layoffs throughout the oil and gas sector, click here.
Forget China, Russia and Iran… the clear and present threat to our prosperity is Saudi Arabia. The Kingdom has regained market share by beating down North America’s oil sector, which was the engine behind both Canada’s and the United States’ economic recovery from 2011-2014.
All the best with your investments,
PINNACLEDIGEST.COM
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