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Saudi Panic

Written by Keith Kohl
Posted October 26, 2016

I didn’t even need to break out the crystal ball for this one.

Come on, did you really think OPEC members would push aside personal gain and actually agree on a production cut deal?

Don’t worry, I didn’t either.

Things started off great in Algiers, didn’t they? After all, it was one of the first times that OPEC has agreed on anything since it formed back in 1960.

Could it finally happen? The moment when the world’s largest oil-producing countries would come together and bring balance to the market? Maybe it took plummeting revenue for them to see the light.

Well, it was fun while it lasted... because it didn’t take long for the first shots to be fired.

OPEC Unglued

It’s almost unnerving how expected this all was, really.

I knew it wouldn’t be long before the first OPEC member broke rank and unhinged the Algiers deal.

This time it was Iraq, who announced that it should receive an exemption from cutting output.

And that, dear reader, is when the dominoes tumbled.

Within days, Russia said it didn’t have to commit to the deal. It’s only natural to assume that the Saudis are ready to firm up their initial position, and that’s when the agreement in Algiers crumbles. I guess it really was doomed like Doha.

Here’s why the Saudis are panicking...

In order for OPEC as a whole to cut output according to the Algiers agreement, Saudi Arabia would inevitably take the hardest hit. Some estimates put the Saudi share in OPEC cuts at more than a million barrels per day.

Assuming the country maintains output between now and the cut, that would mean Saudi Arabia’s production would be at a two-year low.

If you thought the Saudis were nervous about market share before, we’re about to enter an entirely new level of greed.

Should you worry?

In short, no...

Like I mentioned, it’s hard not to think the Saudis don’t have much more room to keep backing up. The question is whether or not the Saudi Kingdom is finally at its breaking point.

Your attention, however, should remain at home, where things are just starting to heat up.

Time to Ride the Upswing

We’re not the only ones betting on an upswing for oil.

After Schlumberger and Halliburton surprised everyone by reporting higher-than-expected profits, both reiterated their bullish outlook for oil. Schlumberger expects demand to increase next year, with drilling activity getting a boost.

Unfortunately, not all shale plays were created equal... the trick is knowing where to look first.

Today, just three oil-producing regions account for nearly half of total U.S. output. Almost 4 million barrels is extracted from the Bakken, Eagle Ford, and Permian Basin every single day.

Thing is, only one of those areas will be the first to rally with crude prices in the $50/bbl range. In fact, it was the only one of the top oil regions where production is increasing!

I’m referring, of course, to the drillers in West Texas.

Companies are starting to choose their sides, too. SM Energy Co. just shelled out $1.6 billion to expand its West Texas position by another 35,700 net acres. In order to raise some of the cash, the company ditched some of its assets in the Bakken.

Look, you’re going to see a lot of posturing in the media by the world’s largest oil producers. Russia, Saudi Arabia, Iran, Iraq... everyone.

Pay no attention to it whatsoever. The Saudis have been backing themselves into a corner during the last two years. They need crude above $50/bbl more than anyone else right now, especially if the House of Saud plans to keep bribing its citizens into complacency.

My eyes will be focused on drillers in West Texas.

And soon, I’ll show you one that’s in a perfect win-win situation.

Until next time,

Keith Kohl Signature

Keith Kohl

follow basic@KeithKohl1 on Twitter

A true insider in the energy markets, Keith is one of few financial reporters to have visited the Alberta oil sands. His research has helped thousands of investors capitalize from the rapidly changing face of energy. Keith connects with hundreds of thousands of readers as the Managing Editor of Energy & Capital as well as Investment Director of Angel Publishing's Energy Investor. For years, Keith has been providing in-depth coverage of the Bakken, the Haynesville Shale, and the Marcellus natural gas formations — all ahead of the mainstream media. For more on Keith, go to his editor's page.

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