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Saudi’s Weapon of Mass Destruction November 29, 2014

Posted by hslu in Economics, Energy, Global Affair, Middle East, Oil, Putin.
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OPEC has decided to keep its oil production at 30 million barrels per day for the next 6 months.

Actually, Saudi decided the course of action and everyone else in OPEC had to go along with what the head of the family wants. The reason was very simple: Saudi is tired of being the swing producer and it is about time for someone else to take up the role.

Well, you might call it Saudi’s Weapon of Mass Destruction: Saudi’s WMD. We call it a WMD because the destruction reaches far and wide.

Consider the following:

1.  US shale oil producers, especially the marginal ones and companies with huge debt, will be desimated. They will see their cash flow cut immediately and they will feel the financial pain right away. Well, they are Saudi WMD’s primary targets and they have no place to hide. Projects will be delayed. Hiring on hold. CAPEX will be cut. Dividends will be eliminated. Pretty soon, some people who have flocked to North Dakota, Pennsylvania and Texas in search of petrodollars will be called into their supervisors’ office because they will be getting pink slips instead of paychecks. People who have paid ridiculous prices for condos or townhouses in these areas will be underwater because they will owe more than their houses are worth. All those petro taxes to the cities, states and the federal government will slow down to a trickle and US GDP growth will drop accodingly.

2.  Some US banks may have to set aside more reserves just to cover the bad debts many shales oil companies will not be able to service. The US shale oil boom was built on cheap loans just like the failed dot.com companies around 2000 which were financed by angle funds and easy money from the VCs. The US shale oil boom is likely about to burst. The 敗家子-like behavior of the American shale oil companies is about to bankrupt the American shale oil industry under the weight of Saudi’s WMD.

3.  Ever since the rumor of Saudi’s ‘no production cut’ position was reported in the news, stocks of oil companies, MLPs, oil drillers and oil service companies have shedded 30, 40 or even 50% of their market values. Many investors have seen the values of their portfolios, IRAs and 401(k)s dropped. Dividends from energy-related companies and midstream MLPs will be cut and a cyclical bear market for these company stocks will begin. We at this time do not know how long this bearish cycle will be because we have yet to see the full range of Saudi WMD’s total destruction force.

4.  Russia’s economy will be hugely affected negatively. Russian GDP growth will probably be negative soon now that the international sanction is in full swing made worse by the depressed crude oil price for any extended period of time. Ruble is down so much from the level just several months ago and millions of Russians are already poorer because of Ruble’s diminishing purchasing power. However, Russia’s huge foreign currency reserve will cuision the blow and the international events will accelerate its pivot to China.

5.  Iran is unfortunately in the same boat like Russia does. America may have played a role in Saudi’s WMD which actually killed two birds with one quick and dirty WMD. It is quite effective, isn’t it? The fact that Iran is the archenemy of Saudi is beside the point. Saudi will take every chance to punish Iran and giving the chance Saudi will not hesitate at all.

6.  There is only one country in OPEC which has negative current account balance: Ecuado. The lower oil price achieved by Saudi WMD will make Ecuado’s situation even worse. Ecaudo is running a budget deficit but the small country has a puny foreigh curency reserve: ~$2.6 billion. Capital will flee. Ecaudo will raise its short term interest rate to stem its currency from sliding to fast. The country will sink into recession and we may see a default coming soon.

7.  Venezuela isn’t safe from Saudi’s WMD either because its budget deficit will increase and its foreign currency reserve isn’t big enough to defend its currency: Bolivar. Economy will tank and people of Venezuela will sadly pay with a lower living standard and a cheaper Bolivar.

8.  The greatest transfer of wealth from oil consumers in the developed nations to oil exporters will slow down a bit. However, this is only temperary. In less than two years, just a guess, oil price will recover and wealth transfer will resume.

9.  Saudi kings, princes and princesses will make less money. They are very rich already so the damage isn’t that bad.

10.  Saudi’s WMD also has many winners. Many countries will pay less for their oil imports: e.g., US, China, Korea and Japan. China in particular will be happy to add to its strategic oil reserve with cheaper oil. Consumers in general will keep more money in their pockets which will stimulate the economy. Sooner than later, economy will pick up and oil demand will rise. Oil production in the world will drop because marginal fields will shut down. Saudi will then remove the WMD and good old days will come back. Saudi will be a happy guy again.

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