Did Saudi Arabia Just Blink? October 1, 2014

Updates

October 2, 2014: everyone is reading the tea leaves to answer the question -- what will Saudi Arabia do. I go back and forth on the issue. Now Reuters/Rigzone weighs in: oil traders say OPEC may be heading for price war --

Saudi Arabia's decision to slash the official selling price for its oil has sparked trader talk of an emerging OPEC price cutting war, as members of the producer group could compete to defend their market share amid ample supplies and tepid demand.

Industry and trading sources in the Middle East say there was now a risk of a race to the bottom, at a time when many were calling for unity from members of the Organization of the Petroleum Exporting Countries (OPEC) as it faces one of the steepest price slides since the financial crisis.

The group's next meeting in November will be closely-watched to see whether it cuts supply. Benchmark Brent crude prices continued to slide towards $90 a barrel on Thursday, a level that leaves many OPEC members - and other large producers like Russia - with painful budget gaps.

Some OPEC countries are becoming more worried about the price drop and calling for supply cuts, but its core Gulf members are still betting winter demand will revive the market. "The Saudis will not cut unless it is a collective cut, they have to hear that others are saying that as well," one industry observer said, speaking on condition of anonymity.

October 2, 2014: Forbes comments on the Bloomberg / Saudi article asking the question, "is Saudi ready to unleash the oil weapon?" The short one-page article was disappointing. This is what I wrote a reader regarding the article:

The Forbes article was un-enlightening. What is the Saudi "oil weapon"? Flood the market with oil, and kill the Canadian oil sands, and hope to kill the Bakken? Or cut production significantly to hope to raise the price of oil?

I honestly don't know. I blogged that I thought Saudi was ready to cut back to keep prices up, but this Forbes article suggests Saudi's recent cutback was due to seasonal decline in demand (seen every year) rather than trying to raise prices.

So, it's still an enigma.

The bad news for oil bulls:

Saudi's 2014 budget requires $89 oil. Since oil has been so high most of the year, the rest of the year, their oil could be sold for as low as $39 and they would still average out to $89 oil for the year. Obviously they won't let oil get that low but they can certainly let oil drift a lot lower.

Human nature being what it is (greed), I doubt the Saudis will let the price of oil drift down too low.

Original Post

 
Readers know that from a global perspective I have been most interested in what Saudi will do in light of plummeting crude oil prices and the glut of oil reaching the market. As recently as two weeks ago, Saudi said they were "staying the course" with regard to oil production / exports.

Did Saudi Arabia just blink?

Bloomberg is reporting:

The worst is over for global oil prices, according to UBS AG and Barclays Plc. After the biggest quarterly drop in more than two years, Brent is set to recover as Saudi Arabia cuts output and demand climbs, they said.

Global demand growth slowed in the second quarter to the weakest since 2011, while U.S. output climbed to the highest in three decades, International Energy Agency and U.S. Energy Department data show. Saudi Arabia, the biggest producer in the Organization of Petroleum Exporting Countries, cut production in August by the most in 20 months. 

It will maintain output at a reduced level until the end of the year as demand for winter fuel increases, a person familiar with its policy said September 26, 2014.

Brent futures slid in the third quarter on the London-based ICE Futures Europe exchange to below the $95-to-$100 range described as “fair” by Saudi Oil Minister Ali Al-Naimi at an OPEC meeting in June. Prices fell as Libya restored output to the highest in a year, China’s economic growth slowed, and crises in Iraq and Ukraine didn’t disrupt supplies. Brent’s premium to West Texas Intermediate, the U.S. benchmark crude, narrowed to the least in 13 months on September 29, 2014.

Saudi Arabia told OPEC its production fell by 408,000 barrels a day -- more than China’s demand is projected to expand this year -- to 9.6 million a day in August. The kingdom plans to keep output close to that level for the rest of the year, while the Paris-based IEA forecasts an additional 600,000 barrels a day of demand on average through December, compared with last quarter. 

The fourth quarter was the strongest demand period in each of the past five years, data from the IEA show. This year will be no different as consumption rises to 93.9 million barrels a day in the three months ending Dec. 31, before sliding to 92.8 million in the first quarter of 2015, it forecasts.

Saudi has a double-edged scimitar with which to deal. They need income from oil but their oil reserves are falling. To maintain the income they need with the price of oil plummeting, they need to drastically increase production, but that further erodes prices and depletes their reservoirs even more quickly. Some years ago, there were hints that Saudi Arabia might flood the market with oil to bring prices down to cripple/destroy the North American energy revolution, where it is very, very expensive to mine Canadian oil sands, and very expensive to to drill Bakken oil. But those efforts failed, partly because of the less expensive oil coming out of the Permian and Eagle Ford (relative to Canadian oil sands and the Bakken).

There have been rumors that Saudi money was financing "green" organizations trying to stop fracking in the US. If so, that effort may have slowed things down, but it did not stop the tsunami of North American oil. It appears that the "greens" have been highly successful in killing/delaying pipelines in the US, only to be "replaced" by CBR. This policy borders on insanity but that's a discussion for another day.

However, a couple of observations with regard to CBR vs pipeline are in order. CBR is much, much more flexible than pipeline, and interestingly enough, the economics seem to work out. In addition, CBR over the long haul should provide a lot more jobs than pipelines. I would think the manpower needed to manage all those trains will always be significantly higher than a pipeline moving the same amount of oil. Monitoring and aintaining thousands of miles of double-track has to be a lot more expensive than monitoring and maintaining pipelines.

If one assumes the Saudis tried flooding the market with oil a few years ago to strangle the North American energy revolution; if the Saudis were the financial backers trying to stop fracking in the US; and, if the Saudis said as recently as two weeks ago that they were going to "stay the course" with their production plans, it appears with today's announcement that Saudi has a) blinked; and, b) thrown in the towel.

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Why I Continue To Invest

This is not an investment site. Do not make any investment or financial decisions based on anything you read here or think you might have read here.

But this Bloomberg story speaks volumes about the opportunities young investors with a long horizon have:

National Oilwell reported a fivefold annual increase in cash from operations last year. Williams said in July the Houston-based company was looking for ways to repatriate approximately $3.5 billion in cash overseas, which would give it “more flexibility” to buy back shares or boost its dividend. The company has more than tripled its dividend since 2013, raising the payments to 46 cents a share from 13 cents.

The buyback may be a concern for some investors that National Oilwell is “in some ways admitting” there are growth challenges or maybe not as many opportunities for acquisitions, Rob Desai, an analyst at Edward Jones in St. Louis, said in a phone interview. “They’re looking for other ways to use capital.”

I started investing back in 1984 or thereabouts; over all these years I have never recalled reports like this, where companies are reporting fivefold annual increases in cash from operations. Fivefold increases in cash and the shares are pummeled. Defies common sense or provides a buying opportunity, one would think. It will be interesting to see what Warren Buffett buys next. Or Bill Gross now that he has moved to Janus. Or Al Gore now that he has announced he will "pour $30 million into Seventh Generation."

This is an observation with regard to investing in general. I have never traded nor invested in National Oilwell and never plan to.

Apple has the same challenge: growing piles of cash. I assume Warren Buffett has that problem.

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Global Warming

Climate Change

Extreme Weather

The note below was posted on the date of the original post. Now, today (October 9, 2014), ABC News is reporting:

This year's Atlantic hurricane season is shaping up to be one of the weakest in decades with only five named storms in the region so far this year.

That is the fewest named storms since the full Atlantic season of 1983, when there were four. The 1994 season also had only five named storms into October, then two hurricanes formed in early November of that year.

Forecasters have projected another two named Atlantic storms for the rest of this year's season that ends Nov. 30. But there are no signs of any new ones spinning off Africa's west coast during what is usually the season's peak period — mid-August to late October.

"The tropical Atlantic is just dead," said Max Mayfield, a former director of the U.S. National Hurricane Center in Miami.

A typical June-November hurricane season has 12 named storms, nine of them hurricanes and three of those major.

When this was pointed out to President Obama, he said, "Well, you know, no one has seen the bogeyman in decades, either, but we know he's there. It's baffling. So kids still need to beware. Likewise with climate change: just because there's been no evidence of global warming, and now climate change, or extreme weather for the past several decades, doesn't mean it's not there. I was telling Michelle just the other night, you know, Michelle, it's baffling. And I've got golfing tomorrow."

Dr Roy Spencer is reporting: almost ten years without a major hurricane. Cross off "extreme weather" from the list of changing war cries.