Saudi Arabia Declares Oil War on US Fracking, hits Railroads, Tank-Car Makers, Canada, Russia; Sinks Venezuela

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When OPEC announced on Thanksgiving Day that it would maintain oil production at 30 million barrels per day, chaos broke out in the oil market, and the price of oil around the globe spiraled into a terrific plunge. The unity of OPEC, if there ever was such a thing, was in tatters with Saudi oil minister smiling victoriously, and with a steaming Venezuelan oil minister thinking of the turmoil his country is facing [OPEC Refuses to Cut Production, Oil Plunges off the Chart].

The bloodletting in the oil markets on Thursday led to some wobbly stability on Friday, and for a while it seemed oil had found a bottom, but then the US stock market closed early while crude continued trading, and suddenly all heck re-broke loose, and the US benchmark WTI plunged again and broke the $66-a-barrel mark before coming to a rest at $66.06. After a near 10% dive in two days, WTI is now down 37% since June!

This chart shows the Thanksgiving plunge following OPEC’s decision, the deceptive stability Friday, and the afterhours plunge:

US-WTI-2014-11-28

Now more information has emerged, confirming prior “rumors” and “conspiracy theories.”

During the closed-door meetings in Vienna, Saudi oil minister Ali al-Naimi told OPEC members that OPEC had to combat the US fracking boom. If OPEC cut output to raise the price of oil, it would lose market share, he argued. The way to win would be to allow overproduction to depress prices to the point where they would destroy the profitability of North American producers. And they’d have to cut production, rather than OPEC.

With Saudi Arabia’s overwhelming power within OPEC, his argument won against objections from desperate members, such as Venezuela, Iran, and Algeria, which wanted a production cut to push prices back up.

“Naimi spoke about market share rivalry with the United States, and those who wanted a cut understood that there was no option to achieve it because the Saudis want a market share battle,” a source told Reuters to make sure the message got out.

Asked if this was a response to rising US production, OPEC Secretary General Abdullah al-Badri essentially confirmed OPEC had entered the oil war against the American shale revolution: “We answered,” he said. “We keep the same production. There is an answer here.”

The bloodletting is spreading.

While the US fracking boom is the official target, Canada’s tar-sands producers are getting hit the hardest. The process is expensive. Their production is largely land-locked and often has to be transported to distant refiners in Canada and the US by costly oil trains. Yet these high-cost producers are getting the least for their oil: The heavy-oil benchmark Western Canada Select (WCS) traded for $48.40 per barrel on Friday, down over 40% from June, the cheapest oil in the world.

Their shares got knocked down in sync: For example, Suncor Energy dropped 9% on Friday, down 27% since June; and Canadian Natural Resources dropped nearly 10% for the day, down 28% since June.

The US shale oil revolution is bleeding as well. Shares across the board are getting hit, many of them outright eviscerated. If the word “plunge” occurs a lot, it’s because that’s what these stocks did on Friday.

  • Goodrich Petroleum plunged 34% on Friday; down 80% from June.
  • Sanchez Energy plunged 29.5% on Friday, down 71% from June.
  • Clayton Williams Energy plunged 25.6% on Friday, down 61% from May.
  • Callon Petroleum plunged 18.6% on Friday, down 60% from June.
  • Laredo Petroleum plunged 33.5% on Friday, down 66.5% from June.
  • Oasis Petroleum plunged 27.2% on Friday, down 68% from July.
  • Stone Energy plunged 24.1% on Friday, down 68% from April.
  • Triangle Petroleum plunged 25.6% on Friday, down 62% from June.
  • EP Energy plunged 25.3% on Friday, down 54% from June.

The list goes on. Even large oil companies got clobbered:

  • Exxon Mobil down 4.2% for the day and 13% from July.
  • ConocoPhillips down 6.7% for the day and 24% from July.
  • Marathon Oil down 11% for the day and 31% from early September.
  • Occidental Petroleum down 7.4% for the day and 24% from June.
  • Anadarko Petroleum down 10.5% for the day and 30% since late August.

Then there is the Oil Service sector.

The Market Vectors Oil Services ETF dropped 8.9% for the day and has plummeted 34% from June. The current standout is its 10th-most heavily weighted component, Norway-based SeaDrill which had announced that it would cut its dividend to zero to deal with its mountain of debt, given the current environment. Its shares swooned on Thursday and Friday a total of 28% and are now down 70% from a year ago. The whole sector followed. This is what debt can do when the going gets tough.

Those are among the official targets of OPEC’s scorched-earth oil war. They’ve been hit, and they’re taking on water.

There is collateral damage.

With increasing amounts of oil being carried by oil trains, the railroads, which had been trading near their exuberant 52-week highs in large part due to the lucrative oil-train business, suddenly took a dive on Friday:

  • Union Pacific -4.9%
  • CSX -3.8%
  • Canadian Pacific -8.0%
  • Norfolk Southern -4.7%
  • Kansas City Southern -5.1%
  • Canadian National Railway -4.6%
  • Burlington Northern Santa Fe, which is owned by Warren Buffett’s Berkshire Hathaway, isn’t publicly traded. But if the oil-train business gets hit, so will Buffett’s “steal.”

But this pales compared to the carnage in tank-car builders. On Friday, they plunged:

  • Greenbrier -15% for the day, -28% from its September high.
  • American Railcar Industries -12.9% for the day, -28.3% since August.
  • FreightCar America -7.5% for the day, -21% since September.
  • Trinity Industries -11.3% for the day, -36% since September.

The oil price move is already cascading through American industry. Bondholders are next. The US fracking boom was built with debt, much of it junk rated. And this pile of debt is now at the confluence of the collapsing price of oil, high costs of production, and sharp decline rates of fracked wells that force drillers to continue drilling just to maintain their revenues. It’s a toxic mix.

And there are victims of friendly fire, so to speak.

Particularly OPEC member Venezuela, dogged by the world’s highest inflation and worst budget deficit, is running out of options. On November 18, President Nicolas Maduro ordered $4 billion in loan proceeds from China to be transferred from an off-budget fund to one counted in the international reserves. The sudden appearance of $4 billion in international reserves pumped up bondholder confidence: the next day in intraday trading, Venezuelan bonds jumped the most in six years.

But it didn’t last long. Within a week, its international reserves dropped by $1.3 billion to $22.2 billion, Bloomberg reported. Venezuela had burned through one third of the Chinese money in one week. Venezuela must have much higher oil prices. Unless a miracles happens, or unless China bails it out altogether – at a steep price – the country is headed for default.

Russia, third-largest oil producer in the world, after Saudi Arabia and the US, also got hit, as did Norway, and their currencies have been brutalized [Ruble Freefall: And the Ugliest Currencies Are?]

But this time it’s different.

This time, OPEC is trying to depress oil prices. In prior years, OPEC tried to push prices as high as possible, but without killing the global economy and demand for oil. The balancing act led to high oil prices that consumers struggled to pay but that allowed the US shale revolution to bloom. If oil had remained at $40 or $50 a barrel, fracking wouldn’t have taken off. OPEC was, ironically, one of the enablers of fracking (yield-desperate investors, driven to near insanity by the Fed’s zero-interest-rate policy, were the other one). And now fracking is threatening to make OPEC irrelevant.

Saudi Arabia, formerly the dominant oil producer in the world, the country whose mere words could shake up markets and manipulate US policies in the Middle East, and the master of an all-powerful OPEC, is reduced to struggling for simple market share, the hard way.

A lot of people believe that the plunge in the price of oil will be brief, and that it has gone pretty much as far as it can go, given production costs in the US and Canada. But the bloodletting in the US fracking revolution will go on until the money finally dries up. Read…   How Low Can the Price of Oil Plunge?

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  12 comments for “Saudi Arabia Declares Oil War on US Fracking, hits Railroads, Tank-Car Makers, Canada, Russia; Sinks Venezuela

  1. LG
    December 1, 2014 at 7:55 am

    Hey Mr Buffet how are things in the oil and rail transportation business? You didn’t see this one coming I bet.

    • J
      December 1, 2014 at 9:49 pm

      Ya Buffett is in bed with Obama and he never was a fan of Keystone for fear of all his train profits would go away.

      Prick.

  2. Jim Mooney
    December 1, 2014 at 9:40 am

    My, what a complex world we live in. Although our “ally,” the Dark Age Kingdom of Saudi (world’s biggest terrorism funder), is hitting us in the nuts, the State Dept may have encouraged this to punish Russia for blocking our takeover in the Ukraine.

    Also, the Koch Brothers, who have immense political influence, own vast tar sands – yet their party is the friendliest to the Saudis. In a way, this mess may cause some misguided people to reorient their love of vile Saudi Arabia.

  3. Orlando
    December 1, 2014 at 10:07 am

    Based on common analysis, not counting debt, 95% of fracking oil recovery costs under $1 gallon ($42 /bbl). The fall in oil price is MORE directly related to the end of QE which is leading to a massive commodity delevering. Commodities usually come first when delverage starts due to their liquidity. If unchecked by central bank intervention, this will spread to most asset classes. The same thing happened in the summer / fall of 2008.
    In this instance, OPEC, Russia and Saudi Arabia are inconsequential victims of their own success. What can the central banks do? Not much, the current budget deficits in both the USA and Europe are under 3%, leaving only about 200 billion between both central banks to monetize IG bonds per year. China can monetize their USD treasury bonds to even less value. In addition, China and Russia have very little sovereign debt to monetize. This is not going to be pretty if it spreads to other asset classes.

    • Yannick
      December 2, 2014 at 3:07 pm

      Actually, if the oil price decline forces treasuries holder to sell them, it may bring back some liquidity to the treasury market, thereby making another round of QE possible…

  4. NY Geezer
    December 1, 2014 at 12:43 pm

    Excellent review and analysis!

  5. MattN
    December 1, 2014 at 2:50 pm

    “Based on common analysis, not counting debt, 95% of fracking oil recovery costs under $1 gallon ($42 /bbl). The fall in oil price is MORE directly related to the end of QE which is leading to a massive commodity delevering. ”

    If it’s so cheap, why the FCFs of the shale oil companies look so horrible and junk bonds are issued with full speed? I think the real production cost for most of those companies is three digit..

  6. Bill
    December 1, 2014 at 3:23 pm

    I think Iran and Russia are the intended targets for the low oil prices – everyone else is just a victim of “friendly fire” … : )

    • Sam Lowry
      December 1, 2014 at 8:48 pm

      I agree, but I would also give weight to Orlando’s observation that it seems timed to address the inevitable consequences of the ending of QE. The way to avoid, or at least postpone, those consequences is to manipulate the price of gold and oil.

      Germany failed to repatriate its gold. Ukraine’s gold simply vanished in the U.S. -sponsored coup. Switzerland’s gold has been sold off. And now OPEC is driving the price of oil down. All would seem to be merely chess moves on a global chess board motivated by the goal of preserving dollar hegemony.

  7. john tucker
    December 1, 2014 at 3:44 pm

    Most of the land in Texas, Oklahoma, and Wyoming just lost about half of its appraised value….and how much of that was purchased on 95% margin debt? Suddenly, the cost of transporting all goods just went down by 30%.
    What is going to happen as those price reductions work their way through the economy? Suddenly, there’s going to be a new wave of credit defaults in some towns and counties, some oil company research and exploration and services, and as those job losses mount up they will touch off a ripple throughout the economy. This has not yet begun to be “priced in” ….

  8. Glen Etzkorn
    December 2, 2014 at 7:39 am

    Saudi’s are doing the American people a huge favor. Pause and never start up fracking again. Let the filthy vile frackers including the CE)’s, shareholders, leasors, politicians, and workers start picking up each and every radioactive particle , plug the wells, clean the soil, repair the damages from earthquakes, pay the medical bills of the innocent folks forced to live near these sites. Seize the frackers assets and send them either to hell or to for profit prison systems

  9. December 3, 2014 at 9:10 pm

    It would be interesting to hear what Naimi actually said inside the OPEC meeting, he could have said nothing … but it doesn’t matter.

    In reality, any cut in production will hurt consumers more than it will hurt suppliers; nobody wants to be the oil minister that pulls the plug on ‘growth’. Less oil = more customer bankruptcies = lower prices.

    Keep in mind, the high prices since 1998 have already hurt consumers to the degree that prices have plunged … 37%.

    The prices are still too high! In fact, ANY PRICE AT ALL is too high. Use of petroleum is non-remunerative waste. For almost 100 years the use of fuel @ sub-$20/barrel allowed for growth because oil waste was cheap to finance. Now … everything is too costly to finance, even with ‘free’ money.

    Don’t worry, children, the oil price won’t go to zero overnight …

Comments are closed.