The Saudis vs the NFL
Over the past week we learned some very important things about OPEC's stance, and the probability of a production cut.
First, we clearly can see that the Media can easily misinterpret foreigners, and it seemed that there was a subtle yet very important misinterpretation last week w/re to a February Russia - OPEC meeting. The rep may have been talking about smaller OPEC countries and not OPEC itself or Saudi Arabia.
Okay, we all get sacked sometimes, but we learned something very important in the process.
Saudi Arabia is still playing hard, maybe even harder than they were at the beginning, and that doesn't seem likely to stop right now. It's late in the game, and they have been pounded by a running attack from relentless US producers who just don't seem like they will ever go away, and that has bruised their defense and poked holes in their defensive playbook.
We can see their vulnerabilities clearly now, we can calculate how long they might be able to survive if oil stays down here, but we can also see that they are very unwilling to budge.
In an environment where they are getting hit square in the face over and over again, while they spew money and incur massive amounts of debt, they are holding their ground and protecting the end zone. This is, after all, their bread and butter, and an onslaught of additional global supply is the last thing they want to allow, so they did what they could to stem it, and they are continuing to do what is needed.
As revealing as some of the information on Saudi Arabia was this past week, so was the data on the risks of bankruptcy and default by many mid-tier players and banks who have lent to them. We haven't really seen any of that, but over the past week we got a better glimpse into exact how close that was to happening.
In the United States we have only seen minor production cuts during all of this, which is a surprise to everyone, and clearly domestic drillers aren't willing to let themselves be run over without a fight, and fight they have, but the numbers just don't add up. They cannot fight for much longer, it's financially impossible for most of the smaller players, and that is exactly what the Saudis are seeing too.
In fact, as I interpret this information, I come to believe that the Saudis also need something for all the trouble they have gone through and all the money they have lost. They don't really trust a production cut deal with Russia, there is a bad history there, so the best win for the Saudis would be to see bankruptcies, defaults, and closures of US operations in addition to major Capex cuts.
We have already seen Capex Cuts from big players; Exxon (XOM) was the latest today to announce this, so the Saudis can taste it, the offensive tactics of smaller US producers are wearing thin, and the Saudis, in keeping with the NFL analogies, are actually stepping up the aggressiveness of their defense in an attempt to beat them back and win the game.
That is, after all, exactly what is going on here; OPEC is defending their livelihood, and they are being more patient than anyone expected, even themselves. Everyone expected the game to be over a long time ago, and it almost finally is, but not quite.
We are almost at a bottom officially in Oil, but the stance taken by OPEC and Saudi Arabia over the past week (more importantly over the weekend) revealed that they want to see damage in the space, tangible production reductions regardless of how they come, and they can see that it's close to happening. The last thing they are going to do at this late stage is concede.
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