The Oil Pricequake: Political Turmoil in a Time of Low Energy Prices

The Oil Pricequake: Political Turmoil in a Time of Low Energy Prices

As 2015 drew to a close, many in the global energy industry were praying that the price of oil would bounce back from the abyss, restoring the petroleum-centric world of the past half-century.  All evidence, however, points to a continuing depression in oil prices in 2016 — one that may, in fact, stretch into the 2020s and beyond.  Given the centrality of oil (and oil revenues) in the global power equation, this is bound to translate into a profound shakeup in the political order, with petroleum-producing states from Saudi Arabia to Russia losing both prominence and geopolitical clout.

To put things in perspective, it was not so long ago — in June 2014, to be exact — that Brent crude, the global benchmark for oil, was selling at $115 per barrel.  Energy analysts then generally assumed that the price of oil would remain well over $100 deep into the future, and might gradually rise to even more stratospheric levels.  

Such predictions inspired the giant energy companies to invest hundreds of billions of dollars in what were then termed unconventional” reserves: Arctic oil, Canadian tar sands, deep offshore reserves, and dense shale formations. It seemed obvious then that whatever the problems with, and the cost of extracting, such energy reserves, sooner or later handsome profits would be made. It mattered little that the cost of exploiting such reserves might reach $50 or more a barrel.  [Read more]

 

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  • Clyde Duncan  On January 15, 2016 at 8:33 am

    Certainly, there is more unintended consequences around the corner …

    Last month, I visited a graveyard, says Matt …

    Specifically, I was just outside Abilene, Texas with my friend Cactus Schroeder to see firsthand some of the leftovers of the huge oil-patch growth that once was.

    What I saw was a virtual graveyard of inactive oil-drilling rigs…

    Cactus brought me there during my recent trip to West Texas. He is a wildcatter, and he’s one of our best contacts in the oil and gas industry. I wanted to see how low oil prices are affecting the Permian Basin, the most prolific oil-producing shale formation in the U.S.

    We walked across a vacant lot toward an old, chain-link fence. Even from a distance, you could see the piles of steel parts resting on the other side.

    “This is what $40-per-barrel oil prices look like,” he said.

    Relics of $100 crude are cropping up all over Texas, as oil producers slash spending to shield their cash flow and maintain dividends.

    -By Matt Badiali, editor, Stansberry Resource Report
    ===============

    We’ll explain exactly what it shows in a bit. First, a bit of background: As Jim Rickards explained here back in October, the Saudi Arabian riyal is more or less pegged to the U.S. dollar. As the dollar has grown stronger, so has the riyal.

    – That’s bad for Saudi Arabia’s non-oil exports (oil is priced in dollars, so that’s not affected). Bad for the tourist trade as well.

    – “When this local slowdown is combined with the global slowdown and the collapse in the dollar price of oil,” Jim explained, Saudi Arabia comes under economic attack from two directions: “Their budgets are in deficit, and they are drawing down foreign exchange reserves to make up the difference.”

    – Key point: The riyal is one of the few currencies on the planet that have not devalued against the U.S. dollar over the last four years.

    – The chart shows forward contracts in the riyal. They’ve soared to their highest levels in nearly 20 years. Traders don’t believe Saudi Arabia can hold out much longer without devaluing.

    – This is the double cross by Washington’s great “ally” we were telling you about yesterday.

    – “Most currency pegs break in a spectacular fashion,” Jim went on to remind us in October. “Think of George Soros’ attack on sterling, which brought the Bank of England to its knees in 1992.

    – But you don’t have to go back more than two decades for evidence.

    – One year ago tomorrow, the Swiss National Bank broke the Swiss franc’s peg to the euro. And in August, the People’s Bank of China broke the yuan’s peg to the dollar.

    – “In both cases, massive trading losses resulted,” Jim said. “Of course, these widespread losses produced massive gains for the few who were on the right side of the trade.”

    – Jim believes the third great currency shock in a year’s time is just around the corner — Saudi Arabia breaking the riyal’s peg to the dollar. Indeed, he has reason to believe the word might come as early as Friday, Jan. 22 — a week from now. – 5-Minute Forecast

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