Looking At Recent Oil Developments

While oil and gas have been a focus of ours for a long time, we are still watching OPEC with the same curiosity that the rest of the world is. In the biggest oil news, Saudi Arabia “retired” oil minister Ali al-Naimi who Forbes had ranked as one of the world’s most powerful people. In his place now is the former Saudi Aramco CEO Khalid al-Falih.

Brent and WTI Crude spot price

The forced retirement of al-Naimi is being hailed as coming out of nowhere by some, but in reality, it was expected by most non-casual observers that his days were numbered. Crown Prince Muhammad bin Salman is continuing his father King Salman’s approach of replacing the old guard of his own brother deceased King Abdullah. 

This is all being done in order to help facilitate the transition of Saudi Arabia from a state almost entirely dependent on oil to one that has a more diversified economy. Saudi Arabia is largely following recommendations laid out in a paper by American firm Woods Mackenzie.

Indonesia, another major oil exporter, has not felt nearly the pain some other oil producers have, precisely because they diversified their economy the past couple decades. Saudi Arabia is hoping to follow that type of lead ahead of the inevitable decline in the use of oil in coming decades.

Two things jump out at me with regard to Saudi Arabia. The first is the “Saudi Arabia will collapse” talk that is starting to permeate the internet. I have read with interest and amusement a lot of the articles and blogs. To say that ideology is a leading form of “evidence” in many of these articles is an understatement. 

As regular readers know by now, I am not terribly ideological. I tend to be a pragmatist who tries to put myself in other people’s shoes. I also think that emotions lead to the biggest mistakes in life, from love to work to money. I also think ideology is often a form of emotional coping. So, I try to discipline myself with both the best I can for fear of making mistakes.

The mistake I think the “Saudi Arabia will collapse” crowd is making is that they fail or refuse to understand that what Saudi Arabia is doing will lead to higher oil prices within a couple years due to lack of new competition. When that happens, they will be positioned to in the words of Sarah Palin to “drill baby drill.”

I have no doubt that Saudi Arabia will make all of their money back in spades as their market share is going to be at least 11.5mbd and probably over 12mbd vs the 9.5mbd it was in 2012-13. People need to recognize that there are virtually no deep water projects scheduled any longer from 2018-2022 which means that Saudi Arabia can soak up all of the excess demand themselves they can handle, which according to Prince Slaman is upwards of 20mbd – which is probably high, but not by as much as folks think.  

Keep watching the developments in oil. If there is one more significant pullback – I suspect there will be – after the next OPEC meeting on June 2nd, that is probably a buying opportunity.

For U.S. investors in oil and gas, it is imperative to find the best positioned survivors of the shale collapse. U.S. shale is shaping up to be one of the swing producers beginning in a year or two since they are flexible, can drill quickly, cheaply and the oil comes out front loaded – the wells flow strongly then deplete quickly over the first two years. This is a core topic in our forum.



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