The $9.2 Billion Bet Against OPEC Dominance

Investors keep hoping the Saudis don’t know what they are doing.

By Kurt Cobb,

The $9.2 billion investors paid to snap up new equity offerings from U.S. oil companies in 2016 proves those investors are indeed ready for more punishment.

The amount is in line with the pace of such equity offerings in 2015 even as the mood in the oil markets has grown increasingly dour. In June of last year I wrote:

New investors in U.S. oil company shares must believe they are catching the bottom and will have a very profitable ride up from here. This demonstrates that OPEC’s work is not done and accounts in part for the decision to leave production quotas unchanged. OPEC’s next task is to convince those making new investments in oil that, rather than catching a bottom in oil prices, they have caught a falling knife.

A lot of investors did end up catching a falling knife as oil careened downward from about $60 a barrel last summer to Friday’s close of about $36. Investors this year may still find that the knife is falling, though it admittedly doesn’t have as far to fall this time around. Still, it seems they misunderstand OPEC’s strategy or believe that that strategy will fail. As I said in the same piece:

The cartel must dampen enthusiasm for investment for the long term if the organization’s members are going to benefit. A crippled U.S. oil industry without friends in the investment world is the only way to assure that rising prices won’t simply lead to a stampede back into U.S. shale deposits.

It seems that the oil industry still has friends in the investment world and that OPEC’s work is therefore not yet done. The big question then is: Will OPEC stay the course or relent with a production cut this year to raise prices?

I doubt that OPEC will relent. As bad as the OPEC countries, including Saudi Arabia, are hurting, to give up at this point would make all the previous suffering pointless. Saudi Arabia is really the linchpin in OPEC. No member can resist the will of the Saudis because they control such huge and flexible oil flows.

I have posited a speculative, but nevertheless plausible reason for why Saudi Arabia may not give up on its strategy any time soon: The kingdom may be at or near its all-time maximum rate of production, a rate it may only be able to maintain for the next decade or so. Naturally, the Saudis want to maximize their revenues during this period of peak production. They can’t do that if U.S. oil companies keep overproducing.

If the Saudis can neutralize those companies, by bankrupting them or forcing widespread lease sales, this will allow major international oil companies to buy up much of these distressed assets. The majors will develop these properties more slowly than the independents did because 1) the majors do not have to worry about their ability to meet debt payments and 2) the majors do not want to crater the price of oil which would only undermine the value of their newly acquired leases.

It is hard to imagine that the Saudis launched their low-price strategy on a wing and a prayer without thinking through how long it would take to force other producers to stop overproducing. But, investors keep hoping that the Saudis don’t really know what they are doing.

So far the Saudis appear to have the upper hand, and I’m guessing that those buying newly issued oil company shares these days are miscalculating once again. After all, the funding derived from these share offerings will only serve to encourage continued overproduction by making it possible for producers to hang on that much longer in hopes of an upturn. By Kurt Cobb,

It’s a sign of how bad things are that we feel optimistic about $35 oil. Read…  Oil Fundamentals Deteriorate, Prices Should Fall Hard

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  19 comments for “The $9.2 Billion Bet Against OPEC Dominance

  1. Chicken says:

    Additionally, someone must foot the bill for the entitlements of 20,000 Saudi Royals, they have needs.

  2. alexaisback says:

    These people are shipping straight to China.

    54 Billion project [ 20 Billion over budget ]
    that is being turned on NOW shipments initiate next week
    ( March 14, 2016 ).

    expected to produce 18 per cent of Australia’s future LNG – that is 18 % of NEW production.

    The Chevron-operated Gorgon Project is a joint venture between the Australian subsidiaries of Chevron (47.3 per cent), ExxonMobil (25 per cent), Shell (25 per cent), Osaka Gas (1.25 percent), Tokyo Gas (1 per cent) and Chubu Electric Power (0.417 per cent).


    They took on a TON of debt and have to sell.
    They have no choice they have to flood the market as quickly as possible.

  3. Mike R says:

    The Fed will continue to covertly support the fracking industry. They will not let it collapse. This is a strategic initiative as well as wrecking certain Mid-East countries such as Libya, Iraq and Syria for their oil (later).

    Restructuring, equity purchase, even new bond purchases. Any and all to keep fracking alive and viable while the Saudi’s attempt to inflict pain.

    Any guesses as to who will win?

    • CENTURION says:

      He who prints the most paper notes Wins.

    • nick kelly says:

      The Fed is going to buy frackers stocks and bonds? And this starts when?
      It better start real soon if Chesapeake and about a dozen other of the biggest not going to go bankrupt.
      Not that the Fed won’t be doing some bailing out: the frackers are going to take a few banks with them. That’s who the Fed MIGHT bail out.
      Penn Central didn’t get a bailout when nat gas crashed the first time.

  4. Chicken says:

    80,000 homes for a year, wow. I hadn’t stopped to think about it thus no idea but seems plausible.

    Good info!

  5. walter map says:

    $9.2 billion? Is that all? Wake me up when the numbers get serious.

    The Saudis won’t be in trouble over oil prices for years. What would give them trouble is a global economic collapse, because right now they’re living on their foreign investment accounts.

    A Take-No-Prisoners World of Oil

  6. walter map says:

    The lower-case letter ii seems to be getting filtered out by the blog software.

  7. RSVP says:

    Iran primed and ready to pump 6bn barrels into the oil supply – its going to $10 a barrel.

  8. DV says:

    Well, it would be stupid to expect that they counted on a year or a year and a half. At least three or even four years will be needed to make sure that oil investment is cut sufficiently and investors are burnt. The most profitable shale areas will be dry and companies will have to go to frontier areas to find more oil. By that time off-shore should also start shrinking noticebale as majors start abandoning their aged fields in the North Sea and Guld of Mexico.

    • nick kelly says:

      Of course. More people need to look up ‘attrition’
      In a war of attrition you know you are going to suffer some pain, but you calculate (sometimes incorrectly) that your opponent will suffer more.
      A good example more from a tactical perspective is the second battle of Alamein, when the British Eighth Army launched a massive attack on Rommel’s Afrika Korps. (He was on sick leave in Austria but would return after a personal plea from Hitler)
      After a week of fighting the German line had still not cracked, so Montgomery ordered ‘Super Charge’ a night- time attack led by the New Zealanders. When the commanders were briefed one of them said it looked suicidal. Montgomery replied: “It has to be done and I’m prepared to accept 100 % casualties in men and tanks”

      People who think Saudi will stop just as their goal is coming into sight are delusional.
      BTW: I laugh at Saudi luxury too but they have begun to tighten.
      If push comes to shove, they may sell austerity as a religious revival.
      Their branch of Islam is theoretically austere and suspicious of luxury.


    some reason you didn’t publish my comments?

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