Panic has run rampant through Wall Street and we believe oil is oversold. Today, the spot price on Brent is 85.04 while WTI is running 82.27 a barrel.
There are many many possible theories as to why the bottom fell out of oil in the last two weeks, the most likely are:
1) Slowdowns in China, Europe and the rest of the world.
2) The Saudis are nervous that the USA has overtaken them in oil production and they are trying to weed out some of the more expensive plays in the US Shale (most US Shale plays need >$60 a barrel to be profitable) by flooding the market (The Saudis admitted over production in September) and selling oil below market price (currently selling a dollar below Brent Spot).
3) A combination of the two.
Since panicking is not a sanctioned strategy here at the BHS, we need to look at the most likely scenario and calculate our next move from there.
We do not believe that the Saudis can keep this up for too much longer. According to the Yemen Times, the Saudis kicked up their social spending budget last year by 36 billion dollars. The IMF the Saudis are going to run a several billion dollar deficit this year and they must keep spending money on social programs or they will run the risk of revolution that we have seen in Libya, Syria, and Iraq. According to the IMF, in 2013, the Saudis needed a Brent price of $89 a barrel to break even, up $13 a barrel from 2012 and the spending must continue to keep the people in line.
We argue that oil is oversold due to the panic and the reliability of Wall Street to overreact. However, the Saudis can keep this up for only the short term. By November, at the OPEC meeting, we may see some fireworks and reluctant production cuts to elevate the price…along with that, a recovery in the US shale stocks such as EOG.