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G&G Associates Tax & Financial Consulting
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G&G Associates Tax & Financial Consulting
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OPEC Threatening World's Largest Oil Producers
Hotep G&G Readers,
Saudi Arabia is rattling the oil sector … and that's bad news for some of the most popular oil stocks on the market.
Last month, the leader of the Organization of the Petroleum Exporting Countries (OPEC) – the oil cartel that has effectively set the oil price for decades – raised the export price of crude oil to Asia… but cut the export price of crude oil to the U.S.
The market went crazy. Oil prices slumped to multiyear lows. News outlets everywhere shouted that Saudi Arabia was taking a shot at the U.S. shale boom. But they're wrong … While it's true that U.S. shale companies will be affected by low oil prices, Saudi Arabia is actually threatening Canadian oil producers.
Let me explain …
Last month, the leader of the Organization of the Petroleum Exporting Countries (OPEC) – the oil cartel that has effectively set the oil price for decades – raised the export price of crude oil to Asia… but cut the export price of crude oil to the U.S.
The market went crazy. Oil prices slumped to multiyear lows. News outlets everywhere shouted that Saudi Arabia was taking a shot at the U.S. shale boom. But they're wrong … While it's true that U.S. shale companies will be affected by low oil prices, Saudi Arabia is actually threatening Canadian oil producers.
Let me explain …
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As regular GGIS Portfolio Readers readers know, new drilling techniques have allowed the U.S. to tap into vast oil and gas reserves locked away in shale.
This sent U.S. oil production soaring 63% from the low in
2008 to today. That's a massive increase in a short period of time.
The "tight oil" coming from U.S. shale is light, sweet crude oil. What our oil refiners really want – what they were set up to run – is the heavier, sour crude oil … the kind that comes from Canada and Saudi Arabia.
That means the U.S. still imports crude oil from Canada and Saudi Arabia. But over the past few years, the U.S. has been shifting from importing oil from Saudi Arabia to importing oil from Canada.
The "tight oil" coming from U.S. shale is light, sweet crude oil. What our oil refiners really want – what they were set up to run – is the heavier, sour crude oil … the kind that comes from Canada and Saudi Arabia.
That means the U.S. still imports crude oil from Canada and Saudi Arabia. But over the past few years, the U.S. has been shifting from importing oil from Saudi Arabia to importing oil from Canada.
From 1994 to
2000, Canada and Saudi Arabia were roughly equal in terms of oil
exports to the U.S. But as you can see from the chart below, since 2000,
the U.S. has looked more to Canada than the Saudis for oil imports...for obvious reasons.
Over the
past few years, this reversal has really shown. In 2013, the U.S.
imported an average of about 1.3 million barrels of oil per day from
Saudi Arabia. In August, that fell to just 894,000 barrels per day.
That's a 31% decline in imports.
Meanwhile, the U.S. imported 3.1 million barrels of oil per day from Canada in 2013. In August, that number went up to 3.4 million barrels per day. That's a nearly 10% increase in imports.
So ... a lot of the imports the U.S. cut from Saudi Arabia are now coming from Canada. For Saudi Arabia, this has been a huge hit to its sales. It's hard to find new buyers for crude oil right now. So, as any cartel would do to secure their turf, Saudi Arabia is taking a shot at Canada because it knows it can likely win a price war.
You see, much of Canada's crude oil comes from tar sands. The tar sands are full of thick asphalt-like bitumen. To extract oil, tar-sands producers have to dig up bitumen and run it through expensive processing facilities to produce quality crude oil. That's much more expensive than conventional oil production in Saudi Arabia – which essentially consists of sticking a straw in the ground and watching oil gush out.
Because of these high costs, tar-sands companies have thin profit margins.
When oil rises, these thin margins can soar… and share prices soar with them. But when oil prices fall, this leverage works the other way… and share prices can plummet.
The best tar-sands companies need to get $50 per barrel for their oil to break even. The rest need between $50 and $90 per barrel. Today, a barrel of bitumen sells for around $56. So many tar-sands companies are losing money. And the best ones are watching their profits get squeezed. The squeeze is already affecting these companies' share prices. Many are down low double-digits since June.
And with Saudi Arabia pushing down the price of oil, profits – and share prices – are going to fall even more. We saw something similar happen in 2008.
During the global crisis in 2008, the price of oil plunged. It ended up falling nearly two-thirds from the start of 2008 to its bottom in 2009 at $34 per barrel. The decline nearly killed the oil sands sector. But with Saudi Arabia essentially starting a price war with Canada, I recommend staying out of Canadian tar-sands companies right now.
Meanwhile, the U.S. imported 3.1 million barrels of oil per day from Canada in 2013. In August, that number went up to 3.4 million barrels per day. That's a nearly 10% increase in imports.
So ... a lot of the imports the U.S. cut from Saudi Arabia are now coming from Canada. For Saudi Arabia, this has been a huge hit to its sales. It's hard to find new buyers for crude oil right now. So, as any cartel would do to secure their turf, Saudi Arabia is taking a shot at Canada because it knows it can likely win a price war.
You see, much of Canada's crude oil comes from tar sands. The tar sands are full of thick asphalt-like bitumen. To extract oil, tar-sands producers have to dig up bitumen and run it through expensive processing facilities to produce quality crude oil. That's much more expensive than conventional oil production in Saudi Arabia – which essentially consists of sticking a straw in the ground and watching oil gush out.
Because of these high costs, tar-sands companies have thin profit margins.
When oil rises, these thin margins can soar… and share prices soar with them. But when oil prices fall, this leverage works the other way… and share prices can plummet.
The best tar-sands companies need to get $50 per barrel for their oil to break even. The rest need between $50 and $90 per barrel. Today, a barrel of bitumen sells for around $56. So many tar-sands companies are losing money. And the best ones are watching their profits get squeezed. The squeeze is already affecting these companies' share prices. Many are down low double-digits since June.
And with Saudi Arabia pushing down the price of oil, profits – and share prices – are going to fall even more. We saw something similar happen in 2008.
During the global crisis in 2008, the price of oil plunged. It ended up falling nearly two-thirds from the start of 2008 to its bottom in 2009 at $34 per barrel. The decline nearly killed the oil sands sector. But with Saudi Arabia essentially starting a price war with Canada, I recommend staying out of Canadian tar-sands companies right now.
But, their lies other opportunities because in the world of investing, as one stock/sector declines, their is another one benefiting. The key is .. do you know how to take advantage of these opportunities.
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Good Investing!
Ankh Uja Snb (Life, Health & Strength)
Asar Maa Ra Gray
Tax & Financial Consultant G&G Associates
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Dr. Kaba Kamene
LEGAL NOTICE:
This work is based on what I’ve learned as a financial researcher and
analyst based SEC filings, current events, interviews, corporate press
releases and what I've learned as a financial consultant. It may contain
errors and you should not base investment decisions solely on what you
read here. It’s your money and your responsibility. Nothing herein
should be considered personalized investment advice.
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