Oil War: Saudi Arabia vs America. US shale oil is now the marginal swing barrel in the new world oil order. Goldman Sachs warns, a decline in WTI to $75/bbl would start to significantly slow US shale growth and thus employment, capex, and the entire US economy.
Goldman Sachs believe that funding gap constraints below $80/bbl WTI will ultimately drive the slowdown in production – see the thumbnail chart. Specifically, balancing capex with cash flow is likely to be the key constraint for shale producers, which continue to outspend their cash flow. As Oil prices decline a shaky future exists for the US energy sector.
For OPEC, cutting production to maintain prices at a higher level is not the optimal (revenue-maximizing) alternative for core-OPEC swing producers, given the current size of US shale Oil. Estimates of breakeven oil price above the 2015 Brent forecast of $85/bbl for many OPEC members raises the question of the fiscal sustainability of these countries. Dennis Gartman in a recent report said, “we’re witnessing the end Of the Oil era,” and later said we are about to see significantly lower Oil prices. So what is going on here?
Some think that the Oil market is all manipulated within the futures market on a pure financial basis. Some have gone on to say it was to crush Russia’s energy sector, as payback for the Ukrainian situation. One can manipulate markets for a while, but in the end fundamentals will drive the market’s macro trends.
In fact I believe the US and Saudi governments are at war with Oil. On the US side, they want to be rid of the Saudis, in order not to have to succumb to their geopolitical whims. The US feels that they are the root cause of much of the Middle East’s lack of geopolitical stability. So partly for US energy sector business interests, and partly for geopolitical security issues, US energy policy has been of one to expand at record pace internal Oil and Gas production.
Coupled with global growth concerns and the expanded US energy output, Oil prices have sagged. OPEC is now in a tail spin. So what will be the Saudi’s and the rest of OPEC’s response be? The Saudis are enraged over the US foreign policy to cozy up with their arch Islamic enemy, the Iranians. As well, when they watch the US energy build up, they are worried about losing influence on the world stage, that could threaten their regime.
Hence the Saudi’s and OPEC will keep the Oil spigots on to try to put the US energy sector out of business. It is an Oil price war. Their goal may be to have a major Oil crash to accomplish this. Perhaps not the end of the Oil era yet, but Dennis Gartman maybe right, Oil could go significantly lower.
Blue Point Trading, William Thompson