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Saudi Arabia Declares War, COVID-19 Spreads, Opportunities Everywhere

Mar. 09, 2020 7:59 AM ETAMLP, BRK.A, BRK.B, GILD, KMI, OXY, VDE, WES, XOM22 Comments


  • Saudi Arabia has declared war among the members of OPEC+ with the country seemingly interested in "turning on the spigots" and flexing its oil market muscle.
  • Across the board, combined with COVID-19 fears, and a potential upcoming recession, prices could drop dramatically. The last time OPEC fought, prices reached an inflation adjusted $16 / barrel.
  • In the long run, prices should recover. Brent crude at $20-30 / barrel simply isn't sustainable, even major low cost discoveries like ExxonMobil's Guyana would be losing money.
  • I expect prices to revert to $60 / barrel Brent, but it might take some time, maybe longer than a year. In the meantime, in an expensive market, fears have resulted in numerous opportunities for the attentive investor.
  • Let me know what you think in the comments below!
  • I do much more than just articles at The Energy Forum: Members get access to model portfolios, regular updates, a chat room, and more. Get started today »

This past week, I wrote an article titled "If You Regretted Not Investing More In 2008, Invest In Oil Now". In it, I discussed how with the market at all-time highs, oil companies represented a bargain that couldn't be found elsewhere. Oil markets (NYSEARCA: VDE) had one of the toughest weeks since 2008 last week, dropping almost 10%. Since then, Saudi Arabia, after failing to come to a price deal with OPEC+, has declared a price war.

Saudi Aramco - New York Times

Saudi Aramco, in the best interest of maintaining its dominant market position, lowered Asia crude oil pricing by ~$4-6 / barrel. North Sea crude, the closest competitive market for Russian Ural crude, got a $10.25 discount to Brent crude. For reference, given current Brent crude prices, that means the price is <$35 / barrel.

COVID-19 Spread

COVID-19 is spreading rapidly. China seems to have gotten a handle on the outbreak, however, outside of China, new outbreaks are popping up in Italy (Europe), Iran, and South Korea.

Paul Graham - Twitter

These massive new outbreaks are spreading at lightning speed. Europe, which was previously segregated from the outbreak, is now growing rapidly. France has almost 1000 cases, Germany has around 750, Spain just hit 500. Several weeks ago, the outbreaks in these countries are negligible, now they're massive.

Italy has recently put Lombardy, a region with more than 10 million people, on quarantine. That's ~16% of the country's population, or for reference, more than twice as big of a quarantine as that of China's Hubei province as a % of the population.

At this point, COVID-19 is looking increasingly unstoppable. The U.S. CDC, under the direction of our highest levels of government, refused the WHO test kit and decided to make its own. Experts are now saying

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This article was written by

The Value Portfolio profile picture

The Value Portfolio specializes in building retirement portfolios and utilizes a fact-based research strategy to identify investments. This includes extensive readings of 10Ks, analyst commentary, market reports, and investor presentations. He invests real money in the stocks he recommends.

He is the leader of the investing group The Retirement Forum with features including: model portfolios, macro overviews, in-depth company analysis and retirement planning information. Learn more.

Analyst’s Disclosure: I am/we are long XOM, WES, VDE, OXY, BRK.B. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (22)

Granicus007 profile picture
This is one of the best articles Ive read in a long, long time. I especially liked reading what will happen when oil capex shrinks, and what that may mean for future oil production (and prices).
Great job!
In Cog Neato profile picture
I'm more concerned how these hard hit companies in my portfolio handle their dividends.
It's hard to resist using current 1Q dividends to buy some of these bargains, however, I had previously decided that this quarter's dividends would be used for some home improvements.
The integrateds now offer both excellent dividend income; garage sale values; and have a strong capitalization. In other words, Buy, Buy, Buy, imo.

Frackers will be shutting wells, voluntarily or otherwise. And, the integrateds will cherry pick whatever viable fracker(s) that are half-way solvent.

The well capitalized Energy cos are now a DEFENSIVE segment and Mr. Market is completely out of his mind. I don't care if the price of a bbl goes lower. I'll bide my time and when the final insult or capitulation occurs -- I will be buying Oil big time.

Or, as an alternative, I can buy 10 yr T Note and get less than a half-percent on my money. IMO, that's what Mr. Market is telling the panic folks and they're listening. Unfortunately, two wrongs don't make a right.

Meantime, the Media is stoking the flames of Pandemic. Nothing like the Media to completely shoot the disabled on the financial battlefield. Heartless bunch of bastards on CNBC.
@combatcorpsmanVN I've turned them off but occasionally I do watch them muted just for comic relief.
ok boomer: Yours is the intelligent approach to 'watch' CNBC. Unfortunately, for me -- when I'm asked by a panic stricken, male or female, retiree if their 401k is going to zero. I ask: "Where did you get that idea? It's been my experience that the answer always seems to involve what was said on CNBC by the self-anointed experts. The elderly know that they can't work any longer and so the shock of the Virus has been a profound in that the elderly, especially with underlying medical issues, are being constantly told about the higher risk to their health.

Then comes the myopic clowns spitting into a microphone on CNBC. Bad, Bad, Bad news -- getting worse -- unrelenting. And, in many, many cases -- the 'experts' are usually wrong in their 150 new 'recommendations' each day to the adoring eyes of female commentators that are more concerned with not having spinach in their teeth while looking into the camera.

Moderation according to Aristotle should be practiced on CNBC when the avalanche of horror stories are scheduled and repeated ad nauseam for several hours of broadcast time each weekday.

And, don't ever expect the SEC or FTC to peek in to see what's actually being said on CNBC.

End of rant.
Wonderful article, and thanks.

Would you consider changing the title of your wonderful article to: Never let a crisis go to waste !!!???

Low price is the cure, so basically, we are talking about the length of time it will take for oil price to recover. Yes, one can buy ETF to minimize loss or buy majors to maximize gain, getting paid dividends while waiting. What is Buffett thinking? i.e. Is BRK buying oil stocks, not interested and doing nothing, waiting to pounce, or selling OXY.

I can think of 3 factors that may influence the recovery time, but I have neither the information or the knowledge to expand on them:-

No smart person sells for less for no reasons. Russia is smart so what truly does Russia want to achieve in exchange for dumping oil cheap in this so-called oil war?

Only God knows the next decisive news coming from the extraordinary combo: house of Saud and Aramco (they are one and the same thing), plus this 35 years old generalissimo, plus this weekend palace discontent.

The financial press has started talking the end of shale, and only the big majors will survive at the end.
glad i did not buy last week! getting interesting out there. bargains will be had but do not rush in
It's a good idea to do some planning to identify some potential investment targets for the future when you can sift through the wreckage of the oil sector but for today stepping to the sideline might be more prudent. This could last a while and its just speculation on when things might return to a more stable oil market environment. Russia this morning declared that can go up to 10 years with oil at 25-30. Are they bluffing or telling the truth? On the surface it sounds like an outlandish claim. My exposure here is limited to a few hundred shares of Suncor as I offloaded my other sector holdings last year.

My guess is everybody keeps pumping out supply in a game of chicken but US shale producers are the first casualty. Without cash flow to cover debt payments they will go bankrupt and default.. Causing ripple effects in the financial system. Oil sands producers should see some distress but most should hang on. Potential for social unrest in OPEC countries is something to watch. Which unfortunate as that might be would in some respects might be supportive of prices.

Most analysts still cling to the idea this will be a cyclical event but my working premise is there are secular changes in markets and we won't be reverting back to current/past trends at any time in the near-term future. That doesn't mean there won't be great investment opportunities it just means they require a reset in expectations.
how do you think our new trade agreement with India might affect the price of XOM and GTLS?
Stanford4 profile picture
When WTI hits 25 start shorting DTO and SCO. The short of a short will be a long oil with the discount of time on the leveraged XTF being on your side.
Thank you for this analysis and outlook. What do you think about BGR?
Stanford4 profile picture
Great article!!
Lenore Goldberg profile picture
Sounds about right, except I wouldn't use the word "massive" to refer to 750 cases in a nation of 83M. It looks like it's just about done in China and it appears to be peaking out in South Korea. With a little common sense locally, great numbers of people in the US shouldn't be infected.

I'm a little less certain that cooler heads will prevail in the Middle East and Russia.
on the bright side, hardly anyone takes the media seriously anymore.
Great Article/Report, life/ oil will stabilize again.Too much panic and Greed.
I wouldn't be at all surprised to wake up tomorrow to find Warren Buffet just bought Exxon or ConocoPhillips over night.
ConocoPhillips is a better choice i think.
Adventureworldwide profile picture
I think $OXY is a better target for Buffett because of his loan to help $OXY do the Anadarko deal. Plus he knows Icahn who has a major stake in $OXY
"Saudi Arabia Declares War"

Might want to say "Price War." Enough panic happening rn
@JoeyT sensationalism sells.
This is ultra complicated as usual with anything involving oil, Middle East, OPEC and Russia however I wondering whether the fact that ARAMCO is now a listed entity actually represents a discontinuous event in that Saudi oil is now driven by corporate profit maximisation rather than purely sovereign interest in the PoO.
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