What Is Going On With The Oil Market?

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Includes: AAL, CCL, COP, CVX, DAL, FDX, NCLH, RIG, SDRL, UPS, XOM
by: Ferdinando Garcia

Summary

Saudi Arabia can withstand lower prices because it has enough currency reserves.

Venezuela, the most fragile country in OPEC, may start to put some pressure on the other countries to stabilize the prices.

The news from Saudi Arabia may be a reminder that the power in the oil market is shifting to the U.S.

Over the last few months, we have seen global oil prices sliding into a bear market on speculation that the biggest OPEC producers were discounting their crude to maintain market share, resisting calls to cut output amid slowing demand growth.

Early this week we heard the decision made by Saudi Arabia to cut crude prices for December delivery to the U.S. market, causing another fall in the spot price of the oil.

How is this possible?

The oil market is a mature industry, the only way to gain market share is at the expense of someone else. This specific situation has put more pressure on the competitors, forcing them to lower their prices.

If we take a look at the country's break even point, we notice that such levels are above the current oil prices. However, according to the International Monetary Fund, Saudi Arabia can withstand lower prices because it has enough currency reserves - about $738.6 billion.

(Keep in mind that oil break-even price is the value at which oil-producing countries can balance their budget or foreign trade.)

Source: Bloomberg Terminal

The latest boom in crude oil production has lifted the output to the highest level in more than 30 years, pushing the price lower because the oversupply of the commodity has overcome the demand.

Source: Bloomberg Terminal

The biggest oil consumers in Asia including China, Japan, India and South Korea count Saudi Arabia as their largest supplier. Asia is a premium market for Saudi Arabia, yet they didn't lower the price for Asia because they know well that they won't lose the Asian market.

Source: Bloomberg Terminal

How long can this go?

The bear market is hurting weaker economies such as Venezuela, which is suffering from the world's highest rate of inflation. This situation has forced the government to make an emergency call to OPEC to set a meeting and discuss the issues concerning the country's main driver, oil.

Also, according to research from Bloomberg, one-third of U.S. shale production loses money at $80 a barrel.

The above mentioned situations imply that players such as the United States and Venezuela will interfere in future negotiation regarding the price of oil. Due to pressure from governments we may see a rebound in the price of the commodity in the short or medium term.

Who are the most likely to benefit from the low prices?

American Airlines Group Inc. (NYSE: AAL)

Delta Air Lines Inc. (NYSE: DAL)

Carnival Corp. (NYSE: CCL)

Norwegian Cruise Line Holdings Inc. (NASDAQ: NCLH)

FedEx (NYSE:FDX)

United Parcel Service (NYSE:UPS)

The companies listed above are more likely to benefit from the low price of oil since their overall costs will decrease. The cost of making business will be lower, helping them to improve their margins.

Who are the least likely to benefit from the low prices?

Conversely, companies directly involved with the oil industry are the more likely to suffer since their "raw material" now is worth less. Drill companies for example may witness lower revenue accompanied with lower margins as the overall business declines. Among the main players we can find:

Exxon Mobil Corporation (NYSE:XOM)

ConocoPhillips (NYSE:COP)

Chevron Corporation (NYSE:CVX)

Seadrill Ltd (NYSE:SDRL)

Transocean LTD (NYSE:RIG)

Final thoughts

Now, it is clear that Saudi Arabia is defending its dominance in the global oil market from new suppliers in Latin America, mainly from Venezuela as the country remains one of the biggest producers of that continent. Also, the news may be a reminder that the power in the oil market is shifting to the U.S.

Although it's impossible to time the market or predict the future prices, oil may find a support level in the near future. I wouldn't like to speculate but I find it somehow difficult to see the commodity going lower - any number under $65 is hard to think about.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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