Attack on OPEC
Timing an Oil Rebound
The new head of the House of Saud was just three years old when his family fortune was made.
It happened back in March of 1938, when a well was drilled near the village of Dammam on the hunch of a geologist from the California Arabian Standard Oil Company. It took three years before they finally hit pay dirt with the Dammam No. 7 well.
The well may not look impressive by today's standards, but it was the proof the Saudis needed to turn their kingdom to control global oil supply.
And even though King Salman may have even seen this well with his own eyes, he'll certainly be the last King of Saudi Arabia to do so.
So what does a newly crowned king do first?
He names a successor, naturally. Except in this case, he named two...
Just as King Abdullah ensured his policies would continue, King Salman named his half-brother Muqrin as Crown Prince. He went a step further, however, naming his nephew Mohammed bin Nayef as Deputy Crown Prince. The former is nearly 70 years old, while the latter is a fledgling 55.
Assuming the current King reaches his predecessor's age, we still have at least a decade before we see another changing of the guard.
The only question now is how King Salman will play the ongoing oil price war he inherited.
Attack on OPEC
Although we tend to hear the outcry “more of the same” more often during election years, that's precisely what the world is going to get from the new King.
I understand it's easy for conspiracy theorists to don their tinfoil hats whenever a position of this magnitude is passed down. Unfortunately, we can avoid speculation, as the King announced he was going to keep Ali Al-Naimi as Saudi Arabia's oil minister.
In other words, Saudi Arabia will continue extracting 9.5 million barrels per day for the foreseeable future. For the record, that amount is just shy of what production in the United States is expected to average this year.
Yet how can we possibly expect the Saudis to reverse course and cut production when the truth is they're surrounded by enemies... even from within OPEC?
If retaining market share is their goal, then King Salman can kill two birds with one stone through low crude prices. Remember, both Venezuela (which threatens Saudi Arabia's crude exports to the U.S. Gulf of Mexico) and Iran would crumble under sustained prices of $50 per barrel.
As you know, the extra-heavy crude from the Orinoco Belt simply isn't economical at this level. Moreover, both countries heavily rely on high crude prices to fund their respective governments.
Of course, that brings us to a bigger problem for King Salman: the tight oil producers in the United States. He may be able to bring his fellow OPEC brethren to their knees, but will he be able to stop the U.S. shale boom?
It may feel that way now, but don't bet on it.
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Long Live the King
Let's face it: It's not as easy nowadays to get starstruck by the now-famous tight oil plays in the Lower 48, especially with crude prices trading slightly north of $45 this morning.
And now that the major players are slashing spending and cutting jobs in response to the current ultra-low price environment, things don't seem much brighter.
Even the declining number of rigs drilling on U.S. soil can cause the investment herd to stampede closer to the edge of the cliff. Since November, the number of onshore drilling rigs fell by 16%.
It's true that the short term looks bleak... but is there a silver lining in this chaos?
Like I just mentioned, the EIA expects U.S. output to average 9.3 million barrels per day this year. This may be 200,000 barrels per day less than it originally projected, but current crude prices will still allow drillers to develop areas such as the Bakken, Eagle Ford, Niobrara, and Permian Basin.
One of my colleagues is fond of reminding me that where there's a crisis, there's also opportunity.
The opportunity here is in the long-term value in energy.
For the week that ended January 16, 2015, the U.S. consumed 20.2 million barrels of petroleum products.
That's an extraordinary amount of oil no matter how bearish your outlook is for the future.
Couple that with the fact that companies across the sector have taken a beating over the last six months, including the names we see plastered across the media.
One class of investments, however, is still paying out strong annual dividends to shareholders. And not only are these companies trading at severe discounts to their current book values, but it's hard not see this buying opportunity for what it is...
Feel free to check the details out for yourself right here.
Until next time,
A true insider in the technology and energy markets, Keith’s research has helped everyday investors capitalize from the rapid adoption of new technology trends and energy transitions. Keith connects with hundreds of thousands of readers as the Managing Editor of Energy & Capital, as well as the investment director of Angel Publishing's Energy Investor and Technology and Opportunity.
For nearly two decades, Keith has been providing in-depth coverage of the hottest investment trends before they go mainstream — from the shale oil and gas boom in the United States to the red-hot EV revolution currently underway. Keith and his readers have banked hundreds of winning trades on the 5G rollout and on key advancements in robotics and AI technology.
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Energy Demand will Increase 58% Over the Next 25 Years
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