Saudi Arabia Is STILL Winning

| About: The United (USO)

Summary

Recent data showed oil imports fell off, but it was anomalous.

Chatter around the oil patch also has some talking about OPEC action again.

However, Saudi Arabia and its OPEC partners are pumping as much oil as possible.

Recent data has me expecting oil prices to drop into the $30s, thus pressuring marginal producers some more.

Saudi Arabia is still winning in its market share battle.

A several weeks ago I authored an article entitled Saudi Arabia is Winning. It pointed out the fact that while domestic oil production is decreasing, oil imports are making up the difference. Clearly, the Kingdom's strategy to battle for market share at the cost of profit margin is working. But two weeks ago, oil imports fell off. Meanwhile, there was some fresh chatter around the oil pit implying the Kingdom might make concessions to partner with peers to freeze production. I'm telling you the excitement is unfounded. Oil import softness was anomalous and, in fact, fresh data shows the Kingdom is operating at historically high production. Meanwhile, the IEA data that was reported last week threatens to sink oil prices and more marginal western producers with it. In other words, Saudi Arabia is still winning. Let there be no doubt.

The Energy Information Administration's ((NYSEMKT:EIA)) weekly Petroleum Status Report two weeks ago showed a severe draw from crude oil inventory, causing a short-lived surge in oil prices. U.S. commercial crude oil inventories fell by a near record level of 14.5 million barrels in the week ending September 2, 2016. It was a jaw dropping draw (say that 3Xs fast), but it was all explainable by a severe 1.8 million barrel per day decrease in crude oil imports, to an average of 7.1 million bpd. The weather report clearly revealed the cause, as shipments were delayed due to hurricane during the period. Still, that did not stop speculators from celebrating the news by pricing oil higher, albeit temporarily.

We hope you didn't celebrate too much, because Saudi Arabia has not run out of oil, and it is not cutting production either. The following week s EIA report for the period ending September 9, 2016 revealed crude oil imports recovered 993K barrels per day versus the storm impacted period, to an average of 8.1 million barrels per day. Crude oil stocks decreased by just 0.6 million barrels in the September 9 period, but the data implies this week's report will post a bigger build in crude oil stocks. That is because the daily average should pick up by another 800K or so to make up the difference of the amount lost due to the storm. Now some might argue that the gasoline pipeline leak (and price increase) could be a factor for increased crude draw, but I highly doubt that would be the case this week if at all.

Other data posted last week by the International Energy Agency (IEA) showed that decreased non-OPEC production was offset by increased OPEC production in August. In fact, the report went on to describe Kuwait and the UAE operating at their highest output ever, and Iran producing at its post-sanctions high. Saudi Arabia produced near its all-time record. So the game is still on, and with its closest competitors and geopolitical rival Iran pumping as much oil as they can, why would Saudi Arabia take it easy now?

Well, the usual chatter from the Russians and Venezuelans has the naïve believing in their desperate assertions that a coordinated production action could occur this month in Algiers. But we heard Sunday from the OPEC Secretary General that the meetings in Algeria would be informal and unlikely to result in any action. Though, perhaps an extraordinary meeting could be called as a result of discussions in Algiers. Hey, anything is possible at any time! Don't count on it yet though. Market pundits refer to the $40 price point as where we can expect oil producers to pick up the jawboning, and we are not there yet. So it would take some lower level for an actual meeting to occur, and I believe a sub-$30 point for real action on production.

Oil & Energy Complex Securities

09-19-16

United States Oil (NYSE: USO)

-0.2%

iPath S&P GSCI Crude Oil (NYSE: OIL)

+0.2%

Energy Select Sector SPDR (NYSE: XLE)

-0.1%

SPDR S&P Oil & Gas E&P (NYSE: XOP)

-0.1%

Exxon Mobil (NYSE: XOM)

-0.2%

Chevron (NYSE: CVX)

+0.2%

Occidental Petroleum (NYSE: OXY)

-0.3%

ConocoPhillips (NYSE: COP)

-1.5%

BP (NYSE: BP)

+0.4%

Total S.A. (NYSE: TOT)

+1.4%

Chesapeake Energy (NYSE: CHK)

-7.4%

Pioneer Natural Resources (NYSE: PXD)

-0.4%

Marathon Oil (NYSE: MRO)

-1.1%

Schlumberger (NYSE: SLB)

-0.5%

Halliburton (NYSE: HAL)

+0.6%

Click to enlarge

Monday's trading was mixed while oil prices were little changed. I continue to expect oil prices to fall significantly into the $30s near-term and recently recommended investors underweight the energy sector. That means hard times for many U.S. energy sector players, and probably insolvency for the most over-levered among them. In other words, Saudi Arabia is still winning. Readers interested in my regular coverage of energy and the factors that move it can follow my column here at Seeking Alpha.

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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in USO, CHK over the next 72 hours.

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