Saudi Arabia Stages “Hit” on U.S. Oil Sector

Prices for West Texas Intermediate (WTI) crude oil have gone negative — meaning below zero dollars per barrel.

Much of the U.S. oil industry was already on life support. Now it’s time to break out the black crepe and open the prayer book to Last Rites.

But make no mistake — what’s happening in the U.S. oil patch is no accident or mere chain of odd circumstances.

This is a long-planned “hit” by Saudi Arabia.  The country is killing the U.S. oil industry. It’s nothing less than first degree murder.

Watch for a string of U.S. oil bankruptcies, along with mass unemployment in the energy sector and a dramatic decline in domestic oil output. It will be followed by a collapse in energy-related banks, hedge funds and other businesses with high exposure to energy.

This is bad, and it’ll get worse.

Let’s drill down on this…

On Monday, WTI Crude — the benchmark price for U.S. oil — closed at an astonishing price of negative $37 and change per barrel. Basically, traders had to pay over $37 to “buyers” to get rid of oil.

Here’s the chart…

oil prices

Texas oil has been cheap in the past, but never this cheap. Even in the depths of the Great Depression, oil never went negative. Up till now, in Texas the lowest price ever was 10-cents per barrel in 1931.

In other words, we’re in uncharted territory.

Commentators say the price collapse is due to the global impact of coronavirus. There have been dramatic reductions in demand because of national-scale lockdowns across the world.

Okay, that’s part of it. But only part… and not the important one at that.

First, let’s be clear — we’re looking at a collapse in prices for oil “contracts.” That is, we’re talking about “paper oil” that theoretically reflects the real stuff.

This “negative $37” is the price for a May-dated contract, which expires today (April 21).

There’s also a June-dated WTI contract, which closed at over $20 yesterday (although that’s falling as I update this note).

Still, the $57 difference between the two numbers (May versus June) is huge!

The problem for oil traders holding May contracts is that there’s next to no storage space if they take delivery of crude oil. According to Reuters News, “barely any buyers are willing to take delivery of oil barrels because there is no place to put the crude.”

In other words, U.S. oil wells are still pumping. But pipelines and storage tanks are full. Refineries are pretty much maxed out in terms of what they can store on site.

Even the ocean is crowded. As Reuters News reports, “Traders are storing an estimated record 160 million barrels of oil on ships — double the level from two weeks ago as they seek to tackle a glut of stocks created by a slide in global demand.”

So yes, there’s a glut of oil. More supply than demand.

Obviously, nobody wanted to buy those expiring May oil contracts. Nobody wants to take delivery on oil just now. Hence, “no bid” from buyers wanting delivery. And traders who “must” sell — lest they actually wind up with real barrels of oil on their hands — have to pay big bucks to get rid of their paper.

There’s your negative $37: a payoff to get rid of the contracts.

It’s a hell of a market squeeze. But again, that’s only part of the tale

The Saudis are more than happy to watch this mess unfold. Indeed, they created it.

For proof, look at the other oil prices on that chart above. There are no comparable price crashes. Brent Crude from the North Sea trades in the mid-$20s, as does Russia’s “Urals” blend. There’s a blend called “Mars U.S.,” from the Gulf of Mexico, trading just under $20. And the “OPEC Basket,” representing the Persian Gulf region, goes for a shade under $18 per barrel.

In other words, oil across the world is not going negative. The price bust is focused like a laser beam at the onshore U.S. oil patch, West Texas and mid-continent to be precise. You know, the “tight oil” market, better known as “shale oil.”

And here’s where Saudi Arabia comes in.

Saudi has long prided itself on controlling the world’s “swing” supply of crude oil. That is, depending on global demand, Saudi can turn its oil valves and move (meaning “swing”) prices up or down. It’s why Saudi has played a leadership role in OPEC, among other things, since the 1970s.

But over the past decade, Saudi has faced price competition from increasing volumes of U.S. shale oil, meaning oil from U.S. “fracking.”

Fracking hit its stride in the 2010s, with oil output from U.S. wells continually increasing. It dramatically reduced America’s need for imports, especially from Saudi. Every new barrel of U.S. oil has displaced a potential Saudi barrel. And this has loosened Saudi’s grip as the world’s “swing” producer, as well as Saudi’s global pricing power.

Basically, with U.S. oil in the marketplace, Saudi has lost control of global oil pricing. So the Kingdom has long dreamed of wrecking its U.S. competition.

Its first attempt to kill off U.S. shale oil was in November 2014, when Growing American output  began to make a dent in global oil pricing trends. Saudi didn’t like that, so it announced plans to increase its own output to grab market share.

By December 2014, oil prices had tumbled from the $70-level into the $40s and even $30s per barrel. Saudi had effectively put a choke hold on the economics of most oil production in North America. U.S. oil that cost more than about $35 per barrel to find and develop just stayed in the ground.

The one thing the Saudis didn’t count on, however, were the near-zero U.S. interest rates, courtesy of the Fed. U.S. oil producers used low-interest money to improve technology and lower production costs.

So U.S. shale oil was able to stay competitive as longs as the global price stayed above $40. But below that, U.S. companies would lose money.

Things then went quiet until this past February, when Saudi indicated that it would increase output to grab market share. Then, at an OPEC meeting in March, Saudi laid its cards on the table.

Russia was present at that OPEC meeting. Russian reps pointed out that Saudi was on track to lower global oil prices with more output. Saudi dismissed the Russian arguments, and went ahead with its production increase. The timing could not have been worse.

By February, Asian demand was already slumping because of China’s national lockdown over the coronavirus outbreak in Wuhan. And the March forecasts were that Europe, North America and most of the rest of the world was in for a demand slump as well.

But Saudi bulled ahead… and the markets responded as you’d expect.

In February and March, oil prices slid from the $50s per barrel into the $40s, $30s. Then as April unfolded, oil prices tumbled from the $20s into the teens.

The coup de grace came recently, with news of eighteen  tankers full of Saudi crude oil headed to the U.S. It’s a “Saudi Armada,” per some news accounts. Saudi is planning to flood U.S. ports with low-cost crude oil.

This is why WTI oil prices tumbled below $10 per barrel to zero… and then negative.

Why are the Saudis doing this? Just follow the money…

In December, I wrote about Saudi Arabia’s “cash grab.” Saudi sold investors a relatively small — 1.5% — stake in the national oil company, Saudi Aramco . That sale raised $26 billion.

“When Saudi sells even a small piece of its massive, state-owned oil company,” I said, “it tells me that KSA [the Kingdom of Saudi Arabia] is desperate for cash. We’re witnessing a money-grab by a country whose government is on its last legs.”

I also said: “Outwardly, KSA appears to be wealthy, and a functioning nation. There’s the huge royal family, massive palaces, fancy cars, private jets, big military purchases and all the rest. The place looks flush, right? But the reality is that KSA is in deep financial distress, for many reasons… And the people are restless. The ruling regime could fall like a house of cards. That’s the heart of the issue here.”

Well, nothing has improved for Saudi in the past four months. The nation still has its vast, high-overhead royal family, the expensive military and everything else necessary to run a petroleum-based welfare state.

In fact, the Saudi treasury requires oil prices to be about $85 per barrel just to balance the country’s annual budget. Anything less and Saudi must dip into national reserves or borrow funds to balance the books.

So as the U.S. oil patch crashes, we’re absolutely looking at Saudi handiwork. Saudi’s goal is to flood oil markets for now, and wreck the economics of U.S. oil production. Kill the competition. Undercut the economics of fracking and drive the U.S. (and Canadian, it’s worth noting) oil sectors are out of the picture.

When most of the North American oil biz has been crushed, you can be sure that Saudi will jack the price of oil back up into that $85 range — if not higher.

Yes, the world is fighting coronavirus. And yes, there’s a global economic slowdown. But the price crash in the U.S. oil patch is purposeful and nefarious. Saudi has a plan. And American economic interests are not part of it.

On that note, I rest my case.

That’s all for now… Thank you for subscribing and reading.

Best wishes,

Byron King

Byron King
Managing Editor, Whiskey & Gunpowder

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A Harvard-trained geologist and former aide to the United States Chief of Naval Operations, Byron King is our resident gold and mining expert, and we are proud to have him on board as the managing editor of Whiskey & Gunpowder.

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