Saudi Arabia Learns a Lesson

Brit Ryle

Posted January 8, 2024

I’m starting to think that Saudi Arabia learned its lesson from 2014-15. 

2014 was the year Saudi Arabia decided it would retake control of the global oil market. Oil prices were up over $100 a barrel. U.S. oil companies weren’t allowed to export yet, but even the Saudis knew it was inevitable – and they didn’t want U.S. oil companies playing in their sandbox…

So the Saudis thought that if they could crush oil prices, it would drive U.S. companies out of business and put the kingdom back on the oil throne. So they started pumping as much oil as they possibly could…

Yes, oil prices fell into the $30s. But that was the only part of the plan that worked. U.S. oil companies got lean and mean, cutting costs dramatically. (For instance, back in 2014, before oil prices collapsed, there were 1,600 drilling rigs working U.S. oil fields. Right now, there are about 500 rigs drilling, and U.S. production is at record highs.)

And the Saudis blew such a massive hole in their budget, they had to bring the state-run oil company, ARAMCO, public and sell shares.

This story always makes me laugh – because it’s like, how could the Saudis misunderstand the global oil market so completely? In truth, it was capitalism and the forces of supply and demand they didn’t understand – doesn’t make it less funny…

For my 2024 Predictions, I said: 

In fact, the biggest risk for oil investors is that Saudi Arabia will attempt to punish US oil companies by opening the spigots and crushing prices like they did in 2014. Oil prices fell from $100 to $35 between 2014 and 2015.

We’re just a few days into 2024, and Saudi Arabia is already throwing its weight around the oil market. Over the weekend, Saudi Arabia said it was cutting prices for Asian customers. Only this time, the target isn’t U.S. oil companies – it’s Russia. 

Sanctions from Russia’s invasion of Ukraine have left just two significant customers for Russian oil: India and China. These two are buying as much Russian crude as they can. China’s buying more than it can use – up to 1 million barrels a day have been going into storage in China. 

The U.S. aside, China and India are the biggest oil importers in the world, at ~10 million and ~5 million barrels a day. These two are Saudi Arabia’s biggest customers, and Russia’s only customers. And the Saudis want to sell them more oil, at Russia’s expense. 

Last year, Russia said it would join Saudi Arabia and cut production to get prices higher. It’s not. Russia is cheating. And when Saudi Arabia tried to get other OPEC+ countries to cut production, the response was “ummm, no.”

The Saudis have apparently learned one important lesson about capitalism – it’s better to go after weak competitors than strong ones. Russia is clearly in a weak position.

Another lesson: OPEC is broken. It’s every country for itself. And that means supply will be plentiful. 

You Can Lead a Horse to Water…But You Can’t Make it Drill

If you happen to hear any presidential candidates promising that U.S. oil companies will “drill baby drill,” please ignore that message. It’s not going to happen. At least, not unless the U.S. government nationalizes all domestic oil companies and stops oil exports. And I somehow suspect that message would not go over very well…

But seriously, you can remove whatever restrictions on drilling there may be, open as much U.S. territory to drilling as you want, there’s still an economic reality to oversupplying the oil market. And that reality is: lower oil prices and profits for U.S. oil companies. 

Somehow I don’t think shareholders or management wants that. 

Ok, that’s what I got for you today, take care and I’ll talk to you Wednesday…

Briton Ryle
Chief Investment Strategist
Pro Trader Today