Crude: The Saudi shakedown

November 7, 2017 09:08 AM
Daily Energy Market Analysis

It seems the move by Saudi Arabia’s Crown Prince Mohammed bin Salman to arrest members of the royal family and their business associates in a corruption crackdown is proving to be wildly popular among the Saudis young population. Yet, at the same time, it is adding a new sense of an oil price risk against a backdrop of a tighten global petroleum market.

Most Saudi citizens are in their 30’s and have grown to be upset with the lavish lifestyles of the multitudes of royal family members and cousins while they struggle to make ends meet. The move by bin Salman to purge and drain the Saudi swamp is playing well at home even as it raises fears internationally of a potentially unstable Saudi Arabia, a long time American ally.

It also raises concerns about a more aggressive Saudi Foreign policy that could lead to an expansion of the war in Yemen as well as a direct confrontation with Iran. The Saudi’s say a missile strike from Yemen on the capital of Riyadh was from Iran and that they would soon respond in an appropriate manner. Concern that an escalation of the War in Yemen could directly impact oil routes and even Saudi or Iranian oil production. Not to mention the risk oil of transportation through the Strait of Hormuz or the Bab el-Mandeb Strait.

Yet, even without the Saudi oil drama, the fundamentals of oil are exceeding bullish. Oil supply and product supply are draining at a record rate as demand goes on a surge that cash-strapped shale producers can’t keep up with. Huge decline rates of shale and the inability to raise cash or get frac crews are creating a logistical nightmare making it difficult if not impossible to respond quickly to the current market situation.

Still, U.S. shale producers still say that they can have their cake and eat it too. Reuters reported that U.S. shale producers are telling investors, impatient for better returns, that they can keep boosting oil output aggressively and do so while still making money for shareholders.

Reuters says that investors have pushed top U.S. shale companies to focus on returns, rather than higher production in a move that threatened to slow the breakneck growth in supply. Reuters says that in comments during recent third-quarter earnings calls, shale executives signaled they expect to deliver both higher returns and output.

At least seven of the largest U.S. shale companies, including Noble Energy Inc (NBL.N) and Devon Energy Corp, forecast 10 percent or better production gains this quarter in the Permian Basin of West Texas and New Mexico, the largest U.S. oilfield.  Yet is 10 percent enough to offset growing demand and OPEC and Non-OPEC cuts. Absolutely not.

While shale producers say they are proving they can drive output higher even after several last summer's reported some Permian wells had begun delivering more natural gas, a sign of aging fields many I talk to in the industry still has their doubts.

The FT reported that U.S. oil production growth this year is on course to be significantly lower than government forecasts, as companies struggle to find the operators and equipment they need to complete the wells they have drilled, according to a new energy research firm. The steady rise in shale oil output from the U.S. has weighed on global crude prices but the projections Kayrros, a Paris-based research firm, backed by former Schlumberger chief executive Andrew Gould, suggest there may be less oil coming than expected on to world markets over the next few months.

The signs of capacity shortages are also good news for oilfield services companies such as Halliburton and Schlumberger, enabling them to raise rates after steep cuts during the industry downturn that began in 2014, but suggest the profitability of U.S. oil and gas producers will remain under pressure.

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About the Author

Phil Flynn is a senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. Phil is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets.