Saudi Arabia Aims at US Fracking Industry, Hits Its Own Foot

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Oil prices have plunged, in reaction to a slew of factors that have finally come together: the “shale revolution” that led to an oil (and gas) production boom in the US and Canada; a separate tar-sands boom in Canada whose only export customer is the US due to infrastructure constraints; iffy demand in China and other emerging economies; declining demand in Europe and Japan….

Add to that an apparent strategic goal by Saudi Arabia to do some real bloodletting among its competitors, namely the exuberant shale-oil drillers in the US and the tar-sands operators in Canada. For years, they’ve been eating Saudi Arabia’s lunch with gusto. It would be time to take that lunch away from them and put the hurt to them via big price cuts [read… The Major Threat to Some of the Largest Oil Producers].

It worked: the hurt is spreading. But not necessarily in the right direction, if stock markets are a measure of pain.

The US straddles the fence as the world’s largest oil-and-gas producer and one of the largest importers, but whose imports have continued to drop. OK, US energy stocks have gotten hit, but overall, stocks are at a flaming record. In Q3 to date, the S&P 500 marked a 4.8% gain.

Stock markets in oil importing countries have jumped too: Hong Kong, Turkey, China, and India are the stars of the chart below, though they don’t quite measure up to Japan, which topped off the mix with a gain of 7.2%. The plunging price of oil (and of LNG, which is tied to the price of oil) in some of those countries might have been only part of the equation. Another factor was the more-QE announcement by the Bank of Japandemonium.

But even sizzling QE hopes and lower energy prices in the Eurozone couldn’t keep Europe entirely out of the red, with France in trouble and Germany wilting.

Oil producing countries have gotten slammed. And look who’s so prominent in this elect group…. So far this quarter, Nigeria, Africa’s largest oil producer, saw its stocks get whacked down by 18.3%, followed by Kazakhstan, Saudi Arabia (-10%!), and Dubai. They’re among the worst 10 stock markets of the 93 that Bloomberg monitors.

However carefully Saudi Arabia might have aimed at the US and Canada and their prolific oil producers, it seems its first shot, which so shook up the markets, hit its own foot.

Global-stocks_Rout-of-the-oil-exporters

But in this shifting balance of power, there’s another factor. Read… Oil Price Collapse Ricochets Around the World, Hits US Drillers, the Ruble … and Russia’s Probability of Default

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  11 comments for “Saudi Arabia Aims at US Fracking Industry, Hits Its Own Foot

  1. Nov 11, 2014 at 6:36 pm

    Nigeria, Kazakhstan, Saudia and Dubai are not credit providers, that is, there is no infrastructure needed to produce exportable credit: such as a banking system, lender of last resort, rule of (contract) law and jurisprudence, private property rights, credit transmission mechanisms, market-recognized currency and a finance tradition. Without a credit infrastructure, these countries must compete for external (mostly dollar) credit as customers; they are competing against the lenders, themselves. As a result, there is no ability on the part of the credit takers to manipulate stock prices higher as is the case in US or London.

    Japan’s stock price rises indicate a run out of yen rather than any economic stability in that country. Zimbabwe had very high stock prices when the Zimbabwe dollar collapsed …

    The idea that Saudia somehow wants lower oil prices is silly. Until very recently, the kingdom has been able to sell every barrel Aramco extracts @ $100+, now it sells for less. What is the gain? Unlike battling retail stores in a price war, oil that is not extracted remains under competitors’ ground where it can be extracted later. If drillers are bankrupted they can be replaced with other companies. The oil does not disappear when it is not extracted, it is conserved … which appears to be a foreign concept to finance analysts.

    :)

    Perhaps the low-cost producers such as Saudia are attempting to recover per-barrel losses with volume … right? Or maybe the customer base has capitulated and cannot meet the high price of oil.

    • Tom
      Nov 12, 2014 at 4:01 am

      Steve is spot on. Great insight.

    • Michael Gorback
      Nov 12, 2014 at 10:21 am

      “The idea that Saudia somehow wants lower oil prices is silly.”

      If they don’t want a lower oil price why are they offering a lower price?

      “What is the gain?” and “Perhaps the low-cost producers such as Saudia are attempting to recover per-barrel losses with volume”

      First of all they aren’t losing money on the oil they sell. They’re just not making as much. That’s a significant difference because you can’t make up losses on volume but you can make for lower margins with volume.

      Maybe they’re just following John Rockefeller’s Standard Oil maneuver. Put your competition out of business by undercutting on price. Then they can retain or even grow their American market share. This maneuver could take out Canada, Venezuela, etc.

      However, the Saudis need oil money to keep their populace happy and under control and thus need a price well above their extraction costs. There’s a limit to how low and how long they can do this. I also doubt they can undercut American fracking enough to put the rigs under permanently. Those rigs can be be shut down and restarted pretty quickly. Some fields can turn a profit as low as $50.

      So at best this is a short-term maneuver. Ultimately you can’t set price; the market sets the price. You can try to manipulate volume but that blew up in their faces the last time they tried it in the early 80s, albeit they tried to reduce volume, not increase it.

      I wouldn’t be surprised at all to learn of a quid pro quo that the US would deal with ISIS if the Saudis put the hurt on Russia (and Iran?). Hard to say if that’s the intention or the side effect and King Abdullah isn’t returning my calls.

      Speaking of credit, lower import prices on oil probably means we’ll have a smaller current account deficit, which means fewer dollars spewed out internationally, which could cause a global liquidity problem. And a stronger dollar will kill those EM countries with dollar-denominated debt.

  2. From Australia
    Nov 11, 2014 at 10:52 pm

    I believe Saudi cut in oil price is politically motivated, compliments of the US Administration, targeting Russia’s economy! The Saudi’s can keep the price of oil subdued for years, if they like, the fact that US frackers are bitting the dust, would just be collateral damage, part of the cost of waging financial war. Look what the US has forced Europe to do! Obama couldn’t give a shit! The push for a US controlled One World Government is getting relentless, to accept otherwise is to live in denial!

  3. retired
    Nov 12, 2014 at 8:44 am

    Could it be that Saudi Arabia is trying to destroy it’s political & religious rival Iran? Are they attempting to destroy the Iranian economy?

  4. Julian the Apostate
    Nov 12, 2014 at 5:40 pm

    Steve, I don’t think you’re being fair to Rockefeller. He to joined a cartel like OPEC called The South Improvement Scheme. He discovered that there was always some member willing to undercut the others for short-term advantage. So he changed tactics and bought up the entire supply chain from the oil wells down to the retail outlets to achieve economies of scale. Those he bought out got Standard Oil stock which made them all very wealthy. The best of the lot became V.P.s in the company. The protective tariffs kept the Europeans like Nobel out, and he eventually achieved a 90% market share. Pure Oil had the other 10%.

  5. James
    Nov 13, 2014 at 7:21 pm

    Are the Saudis’ targeting fracking or maybe targeting Russia for its support of Assad in Syria and Iran?

    Discovered your site today. Very informative.

    • Nov 13, 2014 at 7:47 pm

      James, some Saudi men of influence have already declared that they’re targeting the US shale boom. So we’re pretty sure about that, and it make sense for them to try to do that. At the same time, they’re aiming at the Canadian tar sands, which are an easier target. I have not heard of any confirmation that they’re targeting Russia. BTW, fellow OPEC member Venezuela is going to get kicked off the financial cliff at these prices. Default is next. And it seems they’re just a bystander in this.

      • James
        Nov 13, 2014 at 9:22 pm

        At least the Saudis’ shot themselves in the foot first. Maybe they’ll back off soon. Amazing stuff. Interesting to see how it plays out. Thanks.

  6. Dubai_Sheikh
    Nov 13, 2014 at 11:29 pm

    Um! Guys, Dubai is not a country. The state only accounts for 9% of it’s native country’s oil reserves.

    • Nov 14, 2014 at 12:17 am

      Um, yeah… the chart is about stock exchanges, not countries.

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