Tuesday, December 30, 2014

Oil Producers: Saudi Arabia Knows Exactly What Must Be Done

This article was first published by Seeking Alpha on December 8, 2014. 

Summary: OPEC's decision has exacerbated the tough oil market. However, it looks like the oil cartel has a plan. The ball is now in the American oil producers' court. There are several ways investors can benefit from this downmarket.

On November 27, Saudi Arabia and its 11 partners in the Organization of the Petroleum Exporting Countries (OPEC) failed to agree on production cuts, causing a steep drop in oil prices to their lowest levels in five years.

As SA contributor Michael Fitzsimmons correctly pointed out, the reason for maintaining the 30 million barrels a day of oil output is that Saudi Arabia wants to defend its market share and learn the threshold of pain of U.S. shale producers. In his article, which I suggest everyone must read, Fitzsimmons explains how Saudi Arabia could sacrifice roughly $138 million of oil revenues a day to learn the breaking point of U.S. shale producers. That said, the Saudis "might be surprised at how long it takes" to find this out.

I, however, believe that there won't be any surprises here for Saudi Arabia. The Kingdom understands the realities of the market, and knows exactly what must be done.

Accepting the new kid

By maintaining its existing levels of production, Saudi Arabia, as well as OPEC nations, have also acknowledged the reality of the market, the emergence of the U.S. as the world's biggest oil producer.

According to EIA's estimates, U.S. production has climbed significantly over the last six years amid a shale-powered boom … read full article at Seeking Alpha.