Saudi Arabia

As oil prices wallow near multi-year lows, it’s becoming increasingly clear that the new cartel controlling oil prices is not OPEC but world credit markets. From Saudi Arabia’s record $100 billion deficit to shale oil’s continuing reliance on cheap credit funding, it’s clear that no major oil producer or company in the world right now is economically self-sufficient based on oil revenues alone. This situation has left the flow of oil and the decision on when to stop pumping the increasingly tarnished black gold in the hands of banks rather than oil men.

“We will satisfy the demand of our customers. We no longer limit production. If there is demand, we will respond. We have the capacity to respond to demand," Saudi oil minister Ali al-Naimi told reporters on Wednesday, underscoring the kingdom's belligerent stance as "lower for longer" heads into 2016. Meanwhile, Russia's Finance Ministry may reconsider its forecast for $50/bbl crude, a move which could inflate Moscow's budget deficit.

• Oil rebound fizzles, sending global shares lower (Reuters)
• Saudi Arabia Won’t Change Oil Production (WSJ)
• China suspends forex business for some foreign banks (Reuters)
• Republicans come up short in search for diverse voters in 2016 election (Reuters)
• Oil Prices Become a Problem for U.S. Steelmakers (BBG)
• Oil-Producing States Battered as Tax-Gushing Wells Are Shut Down (BBG)

"At current prices we estimate that valuations for the oil and gas group reflect an implied Brent crude oil price in the range of $65-70/bbl while natural gas leveraged companies reflect a Henry Hub natural gas price in the range of $3.00/Mcf."

I bet OPEC never factored into their analysis the lifting of the US Oil Exporting Ban in 2015 after being a non-starter for so many decades.

The S&P 500 closed at 2052 on November 18,2014. That was 405 days ago, and despite the rips and dips in the interim the broad market average has gone nowhere.

• The World's Richest People Got Poorer This Year (BBG)
• Oil hovers near 11-year lows on abundant supply, slowing demand (Reuters)
• Oil-Producing States Battered as Tax-Gushing Wells Are Shut Down (BBG)
• A Bold Few Traders Earn Billions Flouting Rivals (WSJ)
• Islamic State ruling aims to settle who can have sex with female slaves (Reuters)
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• Donald Trump Urges Supporters to the Polls (BBG)

Santa Claus is cutting it close: after stocks closed down yesterday, and just fractionally red for the year, the jolly old gift-giver (who now has activist investors breathing down his neck) has just three trading days to push if not stocks then the market into the green for the year. And so far, so good, with US equity futures rising by 8 points or 0.4%, on the back of some modest renewed Dollar strength but mostly on oil, which after yesterday's big slide, has managed to stem the decline and is up fractionally, just under $37, along with other commodities if not copper, which falls for second day.

Following yesterday's budget (deficit) and the 'sacrifice-the-people's-comfort-for-the-death-of-US-Shale' plan that we detailed here, it appears market concerns about Saudi Arabia's forward-looking health are rising. As Bloomberg reports, USDSAR 12-month forwards jumped 250pts (the most since December 2007) to 725bps (the highest level since March 1999) implying expectations of a looming de-pegged, devaluation. Perhaps just as worrying is this is the same pattern that played out in August as Yuan weakness sparked HIBOR stress, leading to SAR forward weakness and then US equity market collapse.

2015 was the year of considerable FX drawdown as desperate EM central banks attempted to rescue themselves from reality. As Barry Eichengreen noted, "Intervening to support an exchange rate that’s fundamentally overvalued is a fool’s game and a no-win situation, akin to a sovereign attempting to sustain an unsustainable debt burden rather than yielding to inevitable restructuring."

Even though the odds are never in our favor, there is still hope. Not everyone has to make the extreme sacrifice in order to contribute to the revolution. There are thousands of small acts which will weaken the establishment: "Don’t be a slave to debt. Live beneath your means and accumulate some physical silver and gold. Don’t vote for candidates selected by the vested interests. Spread the message of liberty and freedom to anyone who will listen. Think critically. Do not trust your government. Prepare for the inevitable collapse of this rotten, fetid, corrupt paradigm."

In a bid to shore up its finances in the face of self-inflicted oil wounds, Saudi Arabia is shaking up the welfare state by raising prices on everything from domestic fuel to water. Apparently, persisting in the war of attrition against the US shale complex is paramount - even if it means making life harder for everyday Saudis so the monarchy can buy itself some budget breathing room.

The sustainable floor price for oil is a Brent price in the range of $30-35/bbl. Oil prices could temporarily fall below that level; however, companies would begin to shut-in production as variable production costs would exceed cash flow for some projects

• The Year Nothing Worked: Stocks, Bonds, Cash Go Nowhere (BBG)
• Oil falls toward $37, near 11-year low, as excess supply weighs (Reuters)
• End of easy money for mini-refiners splitting U.S. shale? (Reuters)
• Shale's Running Out of Survival Tricks as OPEC Ramps Up Pressure (Reuters)
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