Saudi Arabia continues to compete with American shale and low-cost oil producers by fueling its foreign reserves with approximately $100 billion. Last year, in light of plunging oil prices, Saudi Arabia made a decision not to cut production of oil—effectively helping to drive, “the price of Brent crude and West Texas Intermediate down below $50 a barrel.”
While Saudi Arabia has not yet won the oil war battle, it appears the oil rich kingdom is preparing to, “double down on its strategy with debt.” The Financial Times reported that, “Saudi Arabia is getting ready to borrow funds in the international bond market to further finance its big effort to protect its market share in the oil world and make life impossible for U.S. shale.” In light of rising budget deficits caused by diminishing oil profits, Saudi Arabia is increasingly in need of funding. Their costly military intervention in Yemen is adding more financial stress.
U.S. shale producers have been a powerful force in the global oil market for decades and, “in a way, Saudi Arabia is taking a page out of [their] playbook by financing their huge expansion with cheap debt.” For all its efforts, Saudi Arabia does have some small victories from the ongoing oil war. Operating rigs in the U.S. have indeed fallen—from 1,925 to 771. While there have also been nearly 20 corporate oil bankruptcies, most of them have been insignificant in size. Additionally, some of the publicly traded oil companies, “like Continental Resources are down 35% in the last year, but others like Pioneer Natural Resources have only seen a 15% drop in the 12 months since Saudi Arabia announced its new policy.”
While U.S. oil production has fallen, it is still producing 9.1 million barrels a day. Three years ago, that number was 6.8 million barrels a day, further indicating that the U.S. shale oil market is a resilient one. Producers have learned how to increase efficiency by cutting costs, reducing drilling times, and storing oil in the ground until prices recover.
As Saudi Arabia continues to pump more oil per day than ever before, it will be a while longer before this oil war ends. However, the U.S. energy market is adept when it comes to carrying debt and managing changes in the market—something Saudi Arabia needs to prove it is equally capable of doing. In the meantime, investors in the energy market have been grappling with low prices all year. If you have questions about how to adjust your portfolio, or just want to go over your financial options, call an expert at Apex Financial Advisors today.