Saudis Look To Past Comebacks In Making Bold Bets On Oil

Deep within its unprecedented cooperation with Russia on oil production cuts is Saudi Arabia’s conviction that, in order to get the price per barrel it wants, it can afford to put its own market share at peril.

An ability to come back from the brink twice in its battle with U.S. shale—the first between 2017 and the middle of last year, and again since the beginning of this year, with Russia on its side both times—has given Riyadh the confidence that it it can eventually make $80 or more from a barrel of oil.

Political history is on the Saudis' side too. From literally getting away with murder—the slaying of the journalist Jamal Khashoggi has hurt the reputation of Crown Prince Mohammed bin Salman more than the fortunes of the Kingdom—to the relatively small price it has paid thus far for its role in the Yemen war, Saudi Arabia has been emboldened into believing it can push the reset button on just about anything.

That explains the Kingdom's current gamble on oil—one of the most audacious in its six decades of managing the oil producers club OPEC.

Despite U.S. crude production having tapered off its highs over the past month, the implied threat to the Saudi market share is all there. Headlines gush about U.S. crude exports hitting record highs of 3.6 million barrels per day and of major Asian customers like Indian Oil (NS:IOC) buying from the U.S., while Saudi production is expected to fall about 30% below norm next month, to under 7 million bpd.

Yet, Energy Minister Khalid al-Falih, in his speeches, harps only about the need for “market rebalancing”, which is Saudi-speak for higher oil prices.

John Kilduff, founding partner at Again Capital, an energy hedge fund in New York, says Falih’s response is a mix of swagger, as well as averseness in admitting to the potential of shale’s outreach. The U.S. Energy Information Administration predicts that the United States will produce more oil than Saudi Arabia and Russia combined by 2025, a forecast Riyadh has so far maintained an elegant silence on. Falih, on his part, announced a historical high in proven Saudi oil and gas reserves at the start of the year.

Said Kilduff:

“Right now, the Saudis still believe they have power to be the swing producer of oil and to manage its price. But they are taking a big chance here with the competition coming from shale.”

As example, Kilduff cites the Louisiana Offshore Oil Port, which loaded 11 VLCCs in its first year of direct exports, with 60% of those cargoes going to India and 23% to China.

He added:

“It’s not just light crude that we’re talking about here. The exports from the LOOP are said to include condensates, and heavier U.S. crude grades like Mars that’s comparable to Middle East oil.”

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Then, there’s the specter of stiffer rivalry from industry behemoths like Exxon Mobil (NYSE:XOM), which claims the ability to make double-digit profit from prices as low as $35 per barrel in the most prolific U.S. shale basin, the Permian.

Exxon, which together with "Big Oil" peer Chevron (NYSE:CVX) plans to extract another 1 million bpd each from the Permian, is also seeking to discover shale at $15 a barrel—a price hitherto possible only in the Middle East.

But some, like Phil Flynn of the Price Futures Group in Chicago, believe shale’s potential is overhyped.

Said Flynn:

“I don’t think the Saudis are worried at all. They can get back market share by offering crude at the right price in the markets they want.”

He added:

“The Saudis know that they and the Russians are still the biggest guys in the business now, and they can turn the spigots off anytime they want and send the price gushing. They don’t have limitations the way the shale guys have to produce.”