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What is MDEF™ Investing? Strategy before tactics. Strategic investments dictate tactical actions in the Metals, Defense, Energy & Food sectors.

- Jeffrey C. Borneman

Still Bullish on Oil? Absolutely

Jeffrey C. Borneman | August 21, 2015

The most oft asked question today is "where is the bottom in the oil price"? Is Goldmann Sachs' prediction of $25 per barrel remotely possible? What about the rig count decline and the cessation of capital expenditures (Capex) on exploration? Are we setting ourselves up for an economic boom from lower prices or inviting a military conflict that would send the price per barrel back into triple digits?

Some review is necessary.

In November, 2013 the U.S. shale revolution was in full swing. The U.S. had increased shale oil production from 5 million barrels a day in 2008 to about 9 million barrels a day. Saudi Prince Alwaleed Bin Talal, the billionaire businessman who is CEO and owner of the Kingdom Holding Company saw the writing on the wall. He said the exploding "shale output in the West poses a genuine threat to his country’s economic stability and future survival."

Alwaleed wasn't kidding. He went on to say “I will make them (the Saudi ministers) get it; there is no doubt about that. I’ll make them get it. It is matter of survival. There is no choice but to get it. I will keep pushing until they do."

The breakeven for the Kingdom is known. It is $106.

Politics or Market Share

The prevailing theory is that the Saudis were willing to pump more oil at half the price to hold on to its "market share" while demand, although somewhat down, did not dictate it such a drastic move. This makes no economic sense at all.

But it does make perfect sense from the political view. It was clear from the start the Saudis finally at SA wanted to drive the American shale revolution into bankruptcy, harm the Iranian regime while America wanted to starve the Russia

The idea that SA wanted to hold on to market share seems to be non-sense. Secretary of State John Kerry

Did the U.S. Double Cross the Saudis?

The theory goes like this: September meeting between John Kerry and Saudi King Abdullah where a deal was made to boost production in order to hurt Iran and Russia.

The debate is NOT between so-called “conspiracy theorists” and those who think market forces alone explain the falling prices. It’s between the people who think that the Saudis decision to flood the market is driven by politics rather than a desire to grab “market share.”

and was

calling for the diversification of the Saudi economy as 90% of government revenues are based on oil sales. Increased supply by America would threaten the Saudi treasury by driving prices down.

Wars have been fought for it, and lost for lack of it ... Oil.

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