Commodities

Saudi Arabia Losing Revenue and Sway in Global Oil Market

by Mike Burnick | March 31, 2017

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.

Saudi Arabia has cut oil production by 800,000 barrels per day since October.

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