Oil macro analysis, page-488

Thanks @fbx258

I’ve seen many comments of yours and they’re very good too. I note that you seem to be a gold fan like me. I’ve got lots of thoughts in my mind to update my last year’s gold comment and hope to find the time to post an updated version soon, like I did for oil yesterday. Cheers.

Welcome @db76
Yeah fully agree that disasters, wars and political events could give a sudden big boost to oil at any time. I actually mentioned “worsening geopolitics” (point 22) as a positive for oil in the longer run last year with the following words – “The geopolitical situation continues to deteriorate the world over, as countries seem to be moving closer to a “bigger” war. If something serious does happen, then this would be positive for oil. Let us hope that this does NOT happen!”

Hi @Spec_hope and @mickmick2891 and @sparkie1

Very valid points and I should have really put this point of “Saudi politics” too as one of the points for long term analysis. It slipped my mind yesterday and I got bored typing half way. Thanks for reminding me. I’ll add a few points here below –

Saudi politics (very positive for oil in much longer run (2-3 years down the line, but could be negative in medium term – coming year)

1/ Saudi has semi - socialist policies with cheap petrol, cheap electricity, and several benefits for Saudis. Recent oil carnage would definitely put pressure to a large extent on all this if this continues for long
http://www.*.com.au/saudi-arabia-budget-deficit-2015-and-oil-prices-2015-12?r=UK&IR=T

Above article says that the situation is so bad that the Saudi government said petrol prices, which is usually very cheap in Saudi Arabia because of the glut of oil it produces, may increase by 50% and diesel, electricity and water prices will also increase. Question – will the local population support the oil war that has been going on? Obviously, there would be some sort of murmuring already, and the obvious question is how long Saudi has keep this up, in the face of local unrest

2/ Saudi still has huge cash reserves but they have been going down
http://www.news.com.au/finance/econ...s/news-story/6cbff89b30916056744ed541c35d97fa

Notice the continual decline in forex reserves since the oil crash in below article

http://www.*.com.au/saudi-foreign-e...-to-lowest-levels-since-2012-2016-3?r=UK&IR=T

3/ Saudi has a big budge deficit (amount of expenditure over revenue) of close to $100 billion.
http://www.*.com.au/saudi-foreign-e...-to-lowest-levels-since-2012-2016-3?r=UK&IR=T
http://www.*.com.au/saudi-arabia-budget-deficit-2015-and-oil-prices-2015-12?r=UK&IR=T

Obviously a prolonged oil war as has been going on would lead to a bigger deficit.

4/ Saudi has been involved in costly wars in recent times (Yemen, ISIS, etc) and spending has shot up dramatically.

http://www.*.com.au/saudi-arabia-budget-deficit-2015-and-oil-prices-2015-12?r=UK&IR=T

5/ Saudi riyal has been pegged to USD since many decades, and there are signs that maintaining the peg is proving to be costly
http://www.bloomberg.com/news/artic...luation-jump-most-in-4-months-on-new-governor
http://www.reuters.com/article/saudi-riyal-oil-record-idUSL8N14R2L820160107

A weaker currency could cause a risk of inflation, and refer point above of potential social unrest as the citizens could get restless with the oil war. With the currency peg, inflation and export prices remained stable.
The other alternative is keep defending the riyal peg and cause even more drain of forex reserves.
copyright link/finance/economics/12089324/Saudi-Arabia-China-riyal-dollar-currency-wars.html

As above article mentions, Saudi has been burning through its reserves at a record pace to defend the decades old peg.

6/ As the same above article mentions, Saudi is going for the unprecedented move of floating its crown jewel Aramco, to boost its coffers. This IMO possibly suggests that Saudi is getting ready for a longer oil war.
copyright link/finance/economics/12089324/Saudi-Arabia-China-riyal-dollar-currency-wars.html

Some of the the above seem to be suggest that this is very positive for oil in the long run because Saudi obviously would not want this to persist beyond their ability to handle the situation, and at some stage they would throw in the towel and push the price of oil up. That is my understanding too, which means that I'm bullish oil in the longer run. But the question is bullish from what level? How long will the oil war persist? How much lower will oil go? Where will it finally bottom? Will there be a long prolonged bear market as was the case with gold?

So why then did I add additional words that they could be negative in the medium term of coming year? Well if I’m looking at this from Saudi’s point of view, then they’ve put in far too already into this oil war to give up now, as can be seen. The oil war has proven to be very costly for Saudi and I don’t think they anticipated it to go on for so long.

On the contrary, they could get even more desperate to go all out for a deeper oil war in the coming year, as they are frustrated by the efforts of the prolonged oil war. And this is why I believe that some pain in the coming year could be very likely


US Shale vs Saudi

Hi @FrankMe
I'm having problems quoting your comment in my reply, since it has gone on the next page.

Yes, you’re very right. Refer my above point. This is not a war that IMO Saudi is ready to lose. I mentioned last year and again reiterated this year that there are 4 main countries to watch – Saudi, US, Russia and US.

Haynes and Boone report that you linked just how many companies have gone bankrupt and just how much debt (billions) is also at stake. Refer to my last year’s comment where I also talked about US shale junk bond bubble (point 18). I’ll repeat that point below –

“Several shale companies have issued bonds at higher yields and in a ZIRP policy environment, investors have gone to them seeking yield. The question is will these companies themselves survive as oil prices keep falling and if they cannot survive, then how can they meet the debt obligations of these junk bonds? Can Fed dare to raise rates in such an environment when it could lead to collapse of several of these companies? Will investors themselves shun these higher risk junk bonds or will they go for it at the risk of losing their entire capital?” – last year’s comment

Well Frank, we’ve got the answer and as you can see the junk bond bubble is bursting with massive bankruptcies. As I mentioned last year, can Fed dare to raise rates in such an environment. Talks of rate hike were costly for the US shale sector as they led to soaring dollar index as I mentioned yesterday, but US Fed has changed course for now.

It should be noted that US has the power to talk down their currency and give breathing space to the shale sector, as many companies will get back online if oil reaches 50 and beyond. It should also be noted that Saudi has the power to flood the market with oil. Both US and Saudi are highly influential in the oil space, and it remains to be seen who will prevail

Also important to note that several big banks have huge exposure to oil companies loan. A complete prolonged collapse of oil could potentially lead to another Lehman like scenario. So US too would not want such a scenario. There are still tons of very vulnerable oil companies. I mentioned in my conclusion last year that managing costs, cash and debt IMO should be top priorities for the oil companies. No one knows when this end.

Once more guys- above is my best interpretation and of course I could be wrong; so please DYOR. As I've said, Saudi and / or US could suddenly change their stance and the whole scenario changes dramatically. Above is my best understanding based on current news flow, and IMO, news should be followed regularly to get a hint of what could come next. Note again what I mentioned yesterday that oil's rise was to a large extent due to collapse of US dollar index. If it continues falling, then oil could continue shooting up. If it rises, then oil could collapse. I spoke more on dollar index in last year's oil comment and much more in my gold analysis, if anyone is interested in reading more.
Cheers