Shale operators in the United States should have crumbled by now… at least, that’s what the Saudis are thinking.
After all, it was the Saudis that sparked the current oil price war, all because the country felt its market share was threatened by the flood of new supply from the United States.
And what started out as a decision by OPEC to maintain output, the Saudis recently kicked it up a notch. In June, Saudi Arabia alone produced 10.564 million barrels per day, a full third of OPEC’s 30 million barrel per day quota.
Now, this was supposed to make oil prices plummet, perhaps closing the door for good on unconventional drilling in the U.S.
But if you’ve been keeping track of the market, you’ll notice that the Saudi strategy is backfiring.
In response, U.S. companies have slashed budgets, laid off employees, and even reduced the number of rigs drilling for oil and natural gas.
What the Saudis didn’t account for, however, is the fact that these companies have also boosted drilling efficiency, lowered costs, and ultimately increased production throughout the supply glut.
And even though production has decreased slightly recently, the last three weeks have seen a rise in rig count across the country.
Make no mistake: when oil prices rise back towards $60, U.S. shale oil producers will be ready to pick production right back up where they left off.
In other words, the Saudis will be right back where they started — quivering in frustration from more light oil hitting the U.S. market.
Saudi Arabia has also tried to hold onto its market share of global refining sector, and is flooding Asian and European markets with around 2.8 million barrels of low sulfur diesel.
This has directly led to lower margins in Asian, causing some refiners to shut down.
Even discounts haven’t spurred more buying from Asia, especially as countries are looking to diversify their import portfolios. And the Saudis know full well that higher crude prices means that these countries will start buying more oil from Nigeria, Iraq, Mexico, and Venezuela.
Considering how critical those oil exports are for Saudi Arabia, it’s hard to see a positive outcome no matter which way crude oil prices swing.
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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.
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