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November 7, 2014

When Saudi Gets In The Face of The U.S. Shale Producer

By Karim RahemtullaChief Resource Analyst, Wall Street Daily

The United States is producing more of its own oil, natural gas, and LNG than ever.
But Saudi Arabia still rules over the oil market with a golden fist.

Case in point: The kingdom is manipulating oil prices in an effort to put U.S. producers out of business and make sure it remains the dominant supplier.

Indeed, the Saudis are dropping their prices for oil exported to the United States so low that it’s cheaper for us to import foreign oil than use our own.

But the soon-to-be Republican-controlled Congress is sure to bring about new export policies that will allow U.S. producers to make billions.

The Short End of the “Chopstick”

The price cuts instituted last week are putting a $200-million dent in the Saudi’s bottom line. So, they’re making up for it by instituting price increases on oil exported to Asian countries.

This tiered pricing is the result of supply imbalances.

You see, Asian countries have little in the way of oil resources and must import virtually all of their oil.
On the other hand, the United States has more supply than ever, and production is only going to increase.

U.S. oil supplies of certain varieties of crude are so plentiful that refineries domestically are overwhelmed with supply. On top of that, the lack of pipeline infrastructure means raw oil is slow to get to processing.

The discount in some regions has reached levels not seen in decades. For example, in August, Permian crude was trading at a discount of $21 per barrel.

The Saudis know this, of course, and have manipulated their prices to ensure the world’s largest consumer of oil – the United States – is still their best customer, despite increased domestic production.
And because of the tiered prices, the United States will soon find itself in quite a ridiculous position: It will export and import crude oil.

This is absurd when you consider that domestic oil production will increase by three million barrels per day over the next decade!

Clearing the Way for Revenue

One would think that all the newfound oil would stay put and reduce U.S. dependence on foreign crude imports. But it’s never been about energy independence as many would have you believe…
It’s all about profits, pure and simple.

U.S. oil producers can sell the fuel for more money outside the United States than inside the country’s borders.

You see, oil pricing outside of the United States uses Brent crude pricing, which has historically carried a premium as high as 15% over the price of West Texas Intermediate crude pricing, which is used inside the United States.

Export difficulties are also partially due to some unfavorable U.S. exporting policies passed in the 1970s in response to the Arab oil embargo.

The country experienced major oil shock when the Arabs banned exports of oil as punishment for the United States’ involvement with Israel in the Yom Kippur War. Oil prices quadrupled overnight, supplies dried up, and the U.S economy contracted.

Some also think that exports will raise the price of oil and gasoline in domestic markets.
However, I think exports will allow U.S. companies to increase production, create jobs, and compete on the global market.
Prices will stabilize and the global premium will allow for better margins – and, ultimately, lower the price of gasoline for U.S. consumers as global oil supplies increase.

The recent victory by the Republicans for control of Congress will likely lead to less oil export restrictions, too. Republicans tend to be proponents of anything related to increasing energy production in the United States.

The bottom line is that there’s a heck of a lot more oil out there thanks to fracking, and it needs a market!

Get on the Export Ship

The major oil companies are in favor of the measure to lift export restrictions, as it means wider margins, and that’s where the focus of your investment dollars should be.

Companies like ExxonMobil (XOM), ConocoPhillips (COP), and Occidental Petroleum (OXY) will be major beneficiaries.

For a stealth play, you can focus on oil/liquid natural gas shipping companies. One in particular, Teekay Corporation (TK), has weathered the storm of lower global shipments quite well.
If oil prices continue to trade at current levels, the chances of lifting restrictions are highly likely before the end of 2015.

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

Courtesy Wall Street Daily (EconMatters article archive Here)  

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