Goldman is saying that oil prices could now sink as low as $20 per barrel. I'm wondering.
Yesterday I wrote about the huge quantity of dollar-denominated debt that is piling up in Saudi Arabia. It was reported that dollar-based loans have increased by 600% so far this year vs. last year. Fully, 65% of all new loans being made in Saudi Arabia were dollar loans.
You know my views on countries that borrow in foreign currency. They are looking for trouble.
I am sure that Goldman's call is well researched from an oil supply/demand standpoint; however, I wonder how much consideration they have given to the Saudi situation. I have not read any real discussion of this. I am the only one.
Admittedly, Goldman could be right in its forecast, even given the Saudi dollar loan problem. I addressed that yesterday in my post. The Saudi gambit of pushing down the price to punish or bankrupt North American shale producers may have set in motion a default-type scenario where lower prices reduce Saudi revenues at time when dollar demand is rising exponentially. That could drive them to produce more, thus pushing the price down further, until the price of oil spirals to single digits. It sounds crazy, but it's possible.
On the other hand, the Saudis may opt for another path out of their predicament. They could abandon their price war against the North American shale oil producers and start cutting output in an effort to boost price.
Why would Saudi Arabia do this? Well, for starters, one could argue that their efforts have only brought limited success with respect to reducing North American output, and more importantly, it appears they have shouldered a huge part of the burden themselves. Saudi Arabia is now running fiscal deficits, which is practically unheard of.
In essence, this may simply end up to be a war that Saudi Arabia cannot afford to win. If I were going to wager (and I think I am), this is the way I would bet, that the Saudis are going to abandon their price war and get oil prices back up.
Look at oil market sentiment, too. It's so negative, it is unbelievable. Even this Goldman call -- another 50% drop -- is pretty incredible after what has already been such a devastating decline.
There are additional reasons that I am bullish. I am not apocalyptic on China as so many others are. Nor do I think that a Fed rate hike, if and when it comes, is such a bad thing. You know, I have written that numerous times that a rate hike is really a fiscal injection. How is that negative?
We may never see $100 oil again, but $50, $60, even $70? That's definitely within the realm of possibility. At those prices, the surviving shale oil guys probably look pretty good, earnings-wise, and that means their stock prices are significantly higher.
So, I am going to fade the Goldman call (not the first time) and look to be a buyer of oil down here. I recently bought some Oasis Petroleum (OAS) in the low $8s. Among the majors I like Chevron (CVX) and Exxon-Mobil (XOM).
Feel free to critique as it only elucidates the situation further.