Yesterday, the FT reported that less than a year after Saudi Arabia launched its attack on "marginal" US shale producers which has sent the price of WTI crashing by more than 50% from $100 before recouping a substantial portion of the losses and last trading around $60, the Kingdom gloated in declaring victory over US shale. To wit:
Saudi Arabia says its strategy of squeezing high-cost rivals such as US shale producers is succeeding, as the world’s largest crude exporter seeks to reassert itself as the dominant force in the global oil market.
The kingdom’s production rose to a record high of 10.3m barrels a day in April and there is no sign that it plans to reverse its policy at next month’s meeting of Opec, the producers’ cartel, in Vienna.
“There is no doubt about it, the price fall of the last several months has deterred investors away from expensive oil including US shale, deep offshore and heavy oils,” a Saudi official told the Financial Times in Riyadh, giving a rare insight into the kingdom’s thinking on oil strategy.
Which is great, but there are two problems.
First, any time someone say "there is no doubt about it", or "unambiguously this or that", it is a lie.
Second, Saudi Arabia is dead wrong.
For one thing, as the following Deallogic chart shows, investors are itching to jump on what has become an M&A bonanza in the form of a record amount and number of M&A deals YTD, not only globally but in the US as well.
This excludes the surge in new junk bond and equity issuance in recent weeks as yield and BTFD-starved gamblers with other people's money couldn't wait long enough to BTFD and rushed into the most beaten down sector in 2015.
But what's worse for the Saudis is that while the Fed's zero-cost money policy means US shale can weather out almost any collapse in oil prices is a report from the WSJ that "U.S. shale-oil companies say they are ready to bring rigs back into service, setting up the first big test of their ability to quickly react to rising crude prices."
Last week, EOG Resources Inc. said it would ramp up output if U.S. prices hold at recent levels, while Occidental Petroleum Corp. boosted planned production for the year. Other drillers said they would open the taps if U.S. benchmark West Texas Intermediate reaches $70 a barrel. WTI settled at $60.50 Wednesday, while global benchmark Brent settled at $66.81.
An increase in U.S. production, coupled with rising output by suppliers such as Russia and Brazil, could put a cap on the 40% rally in crude prices since March and even push them lower later in the year, some analysts say.
“U.S. supply could quickly rebound in response to the recent recovery in prices,” said Tom Pugh, a commodities economist at Capital Economics. “Based on the historical relationship with prices, the fall in the number of drilling rigs already looks overdone, and activity is likely to rebound over the next few months.”
And so the oil cycle will repeat as what has been a relentless buying spree for the past two months in oil, becomes a selling scramble, as the Saudis get a second chance at being right in crushing US shale producers.
In the meantime, however, they have a long way to go. Exhibit A: the number of oil wells in the Bakken just hit a new all time high:
And Exhibit B: after declining for two months, Bakken oil production rose in March for the first time in 2015. Considering the price of oil rose further in April, Bakken daily oil may well be at record highs as of this moment!
The commentary from North Dakota was simply priceless:
North Dakota posted a surprising jump in oil and natural gas output in March, as producers leaned on newer technologies and processes to offset a slump in commodity prices.
Many industry observers had expected output to fall for the third consecutive month in the wake of a more than 50 percent drop in oil prices since last summer.
"We scratched our heads in the month of March" as to why production increased, Lynn Helms, director of the state's Department of Mineral Resources, said during a conference call with reporters.
Yet the increase shows producers' willingness to wring efficiencies out of existing operations, as well as their attempt to maintain production, even at depressed prices, to safeguard relationships with service providers ahead of any future spike in crude oil prices.
About 189 North Dakota wells were completed in March at locations owned by Exxon Mobil Corp, Hess Corp, Continental Resources Inc and ConocoPhillips, reversing a trend in which most producers delayed completions.
"These four appear to be more in tune with having normal cash flow, and continue to complete their wells in a more aggressive manner," Helms said.
And the rest will be ok too for the simple reason that what the US shale space is missing in organic cash flow, it can promptly compensate for with yield chasers' desperation to generate a 10% return on other people's money by investing in junk bonds that have zero chance of ever being repaid.
Real end result: Saudis 0 - Shale 1, if only for the next few months. If and when oil once again crashes back to where the Saudis need it to drop if they truly want to destroy the US shale industry, somewhere around $20/barrel, then the final outcome will be very different.