“I don’t know how practical it is to try to kick shale out of the market…”
So confides an anonymous oil minister from OPEC (the Organization of Petroleum Exporting Countries). Reuters reports the global oil cartel voted against cutting oil production worldwide on Friday. The group extended its current ceiling of 30 million barrels of oil per day for another six months. That’s one million barrels of oil per day above its own estimates for oil consumption in the first half of next year.
The move sent oil prices plummeting from $72.84 per barrel on Wednesday’s pre-Thanksgiving close to $64.82 by Monday’s opening (a drop of over 12%). It then dipped as low as $63.72 during the trading day. Oil hasn’t been that cheap since July 2009… when the “Great Recession” crushed demand across the entire world.
Saudi Arabia led OPEC’s move. It’s a deliberate attack against the U.S. shale oil and gas revolution. Regular Daily readers know advancements in recovery technologies—like horizontal drilling and hydraulic fracturing (or “fracking”)—have unlocked enormous quantities of oil and natural gas under U.S. soil. It’s led the U.S. to regain the top slot as the No. 1 oil producer in the world (over 9 million barrels per day). And it’s caused No. 2 ranked Saudi Arabia to panic… and start a price war.
Crude Oil Has Fallen 29% Since Early September
The Saudis can pull oil out of the ground for around $10 per barrel. That’s because they’re still able to use conventional recovery techniques. In America, sourcing oil from shale rock formations is more expensive. According to the International Energy Agency (IEA), the majority of U.S. production remains viable at around $42 per barrel. The Saudis hope to use their lower extraction cost to disrupt America’s growing oil independence.
The Saudis have started a dangerous game. The oil market has ties to every other sector of the global economy. Destabilizing it often exposes countries’, corporations’, and investors’ poor investment decisions. Similar episodes in the past have led to bankruptcies, economic turmoil… even war. For example, when the shale revolution first created a natural gas glut in 2011, major U.S. gas producer Chesapeake Energy saw its stock plummet 59% over 14 months. Many thought the company would go under.
These are disturbing possibilities, but they shouldn’t cause Palm Beach subscribers to lose any sleep. As long as you employ our critical risk-management protocol—the Palm Beach Three-Legged Stool of Safety —you’ll be able to stay in the ongoing bull market as long as possible.
Remember, lower oil prices also mean a substantial boost to almost every other sector of the economy. Every 1-cent drop in the price of gasoline injects an additional $1 billion into the U.S. economy. That’s a strong, bullish tailwind.
Bottom line: It’s a mixed bag. OPEC’s price war means the vast majority of Americans stand to benefit through cheap energy prices. But Saudi Arabia may succeed in bankrupting some American independent oil producers, whose extraction costs are too high. Expect high volatility to remain in the oil sector over the coming months. And if you own oil-related stocks, pay particular attention to our next item…