Larry Edelson called the oil market direction right last October, when he warned that OPEC’s last ditch attempt to maintain relevance wouldn’t hold.
He also noted the financial turmoil taking place within the cartel’s largest player: Saudi Arabia.
And the fact is, I’m not one bit surprised about what’s happening.
Consider the cartel’s late 2014 maneuvering, where members increased oil production to protect market share and attempt to drive U.S. shale producers out of business.
The result: Oil prices plunged more than $30 per barrel.
And to make matters worse, OPEC’s move also wreaked havoc on member finances, with Saudi Arabia one of the hardest hit.
Fast forward to 2016…
The cartel once again tries to meddle in the oil market with an agreement to limit production, balance global oil supply and demand and put a price floor in the market.
It didn’t work this time any more than it did in 2014. And it’s blowing up member balance sheets in the process.
But the story’s not over.
Committed to making the latest shenanigans work — and preserving their relevancy — Saudi Arabia has cut oil production by 800,000 barrels per day since October.
You read that right: 800,000 barrels a day in slashed production, a stunning 60% more than promised.
But they haven’t learned their lesson: Despite the cuts, Saudi Arabia is once again feeling the hurt.
In fact, the combination of reduced oil production and lower prices are a recipe for disaster, especially since oil revenue made up 62% of government income in 2016.
As a result — and desperate for funds — Saudi Arabia came out with a $17.5 billion bond offering last year. Unfortunately, that only covered 22% of their 2016 fiscal deficit.
That’s why it’s no wonder that the country’s soaring deficit, dwindling reserves and weaker fiscal condition have prompted Fitch to downgrade their credit rating in March.
But that’s not all.
Saudis are also losing market share to U.S. shale producers and being out gamed for European business by Iran and Iraq. They also face greater Russian competition for Asian oil demand.
As a result, the country’s been forced to cut back on capital expenditures and subsidies for water, fuel and electricity.
They’re also pursuing a bold initiative to diversify through a public offering of state-owned Saudi Aramco.
Here’s what to do …
With all these pressures mounting, it’s only a matter of time before the Saudis — and the rest of the cartel — throw in the towel. And that’s going to mean lower prices for oil in the long run.
But in the short run, my E-wave charts are calling for a corrective bounce into early May. That should provide some outstanding, short-term oil plays.
But don’t back up the truck: The next downdraft in oil is right around the corner. And we’ll know just how to play that one as well.
Good Investing,
Mike Burnick
D. A. Grgurich April 5, 2017
%%o anybody who knows the oil industry this is no surprise. The oil shale plays and booms of the past few years have been like the gold rush of 1849. In North Dakota it was impossible to get your car worked on because all of the mechanics were working in the fields at wildly inflated wages. Housing was short and everything was in demand due to the pressure of incoming workers. All of this was driven by speculators who, with money loaned at unbelievably low rates, bought leases. Then came the crash which every savvy oil man knows will come. The speculators are out of business (read broke) and real oil people have moved into the area, buying the speculators out at cents on the dollar. But, the technology is sound, the resource base is almost limitless and technology is driving the price of a shale well lower and lower. SAUDI ARABIA, THE REIGN OF OPEC IS OVER. The USA is now the marginal producer and prices will never be what they were under OPEC.
Bob April 4, 2017
Mike…..
You say in the short run a corrective bounce in early May. I am assuming you mean up??
You say lower oil prices in the long run.
I am confused………..
Larry called for lower oil prices April to May.
Larry called for higher prices after May to the end of the year.
I am confused………..
FrankZ April 1, 2017
There are some other oil producing countries, who cannot afford the reduced foreign revenue. That means
that when the oil price goes down “they” would want to pump more. Which in turn forces the price to go down even further. Where the oil-price finally will end-up is everybody’s big guess.
Richard March 31, 2017
Mike,
Your doing a grand job in filling Larry’ shoes! Keep up the great work—and writings!
Smitty March 31, 2017
Why doesn’t the U.S. Restrict or not allow importing oil all together?
bharathy March 31, 2017
YES WHAT IS THE ACTUAL QUANTUM
Paul Claxoxn March 31, 2017
The Saudi’s will eventually climb on their camels and go back to the desert…….LOL
Geos March 31, 2017
So much for $26. USO Edelson called for.