Crude Oil Price War Erupts

I was wrong.

Had you asked me in the months leading up to OPEC’s latest meeting in Vienna what the outcome would be, I almost certainly would have said that the 12-member oil cartel is stuck between shale rock and a hard place.

In my opinion, the pain of oil prices below $70 per barrel would be too much; price hawks within that organization would be screaming bloody murder.

Unfortunately, it’s what the Saudis think that counts. I mentioned earlier this year that the Saudis are absolutely terrified of the U.S. tight oil boom. At the time, it was a Saudi Prince who was sounding the alarm over the potential of tight oil.

Well, it turns out somebody was listening.

OPEC’s conclusion was to leave production levels unchanged.

And you don’t need me to tell you what that means for global crude prices. Oil trading in London declined more than 10% the next day, while Western Texas Intermediate dropped to a fresh 52-week low of $63.72 per barrel this morning.

But did OPEC just shoot itself in the foot all in the name of taking U.S. producers down a few pegs?

I believe it did.

More importantly, I also think the Saudis are about to create a new class of millionaires out of today’s individual investors…

Can OPEC Survive a Crude Crash?

Let’s face it: If the Saudis didn’t rule OPEC with an iron fist, there would be absolutely no question that the group would have decided to cut production. In fact, some members believe that cut would have been roughly 1.5 million barrels per day had it not been for them.

It turns out I underestimated the Saudis vehemence toward the U.S. oil boom.

Just think what they had to overlook in order to keep output steady…

Forty-four years ago, the Saudi government spent about $1.6 billion.

In 2010, that amount swelled to $158.9 billion, making it arguably one of the fastest-growing economies in the Middle East and North Africa.

Remember, revenue from crude oil exports accounts for nearly 90% of Saudi government expenditures!

Earlier this year, the IMF reported that Saudi Arabia’s break-even price has jumped approximately $50 per barrel since 2009, and the nation needs prices around $80 to balance its budget.

Of course, this is also on top of the fact that Saudi Arabia’s oil consumption is steadily increasing and currently stands at about 3 million barrels per day.

To put it simply, even the Saudis can’t withstand a drawn-out oil price war.

And although OPEC left output untouched, I’m still doubling down on my bet that OPEC will cut its production levels in early 2015.

OPEC’s Internal Conflict

You see, even though solidarity among OPEC members is crucial, not all of them are in the same position. And the pressure on other oil-producing members will become too great to ignore.

Just take a look at Venezuela and Iran…

The latest extension in talks over Iran’s controversial nuclear program means the country will be unable to put more of its oil on the global market. Right now, it’s exporting less than half of what it would without sanctions in place.

In other words, it’s more than low oil prices that can cripple Iran.

In Venezuela, the situation is even worse once you consider that the country, with roughly 256 billion barrels of oil reserves, is actually importing oil right now!

Remember, we’re talking about sour, extra-heavy crude, not the light, sweet crude that is extracted in U.S. tight oil plays like the Bakken. Because of the extremely poor quality of Venezuela’s crude, the country simply doesn’t have the capability to refine it.

Then again, perhaps this last bit is one of the reasons the Saudis aren’t rushing to cut production. Together, both Saudi Arabia and Venezuela export almost 1.4 million barrels per day — or 70% of exports by OPEC members — to refineries along the U.S. Gulf of Mexico.

Maybe it’s just time the Saudis settle family business inside OPEC?

Unfortunately for young Saudi oil princes, there’s one OPEC member that is untouchable. Price hawks like Venezuela and Iran may topple in an ultra-low oil price environment, but that doesn’t mean everyone is as vulnerable.

For one burgeoning Middle East oil field, the story is only just beginning. And it’s taking place in one of the unlikeliest regions.

One of my colleagues recently got back from a research junket that took him halfway across the globe.

But I’ll let him explain the full details to you right here — absolutely free.

Until next time,

Keith Kohl

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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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