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Fuel-Gauging the Middle East at the Dawn of 2016: A Story of Constraint

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Jan. 28 2016, Updated 8:06 p.m. ET

The Middle East is undergoing a transformation

Middle Eastern countries like Saudi Arabia, Iran, and others are sensing the need to diversify their economies from being oil-dependent to being more viable on the global stage. As renewable energy uses have grown in the recent past, these nations are starting to see that the trend could lower the demand for crude in the future. The top oil exporter can’t keep high reserves in a future where the demand for crude may fall. So these nations are putting their oil on the market now and all at once.

[marketrealist-chart id=1001200]

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Saudi Arabia’s plan to grab more market share

Saudi Arabia hasn’t recently signaled any production cuts. This simply points toward Saudi Arabia’s plan to grab more market share, even at lower cost. It also gives the kingdom the following two advantages:

  • to make revenue from crude oil, as entry barriers in the energy sector can be influenced by new technology
  • to lower crude oil, thus affecting the financial stability of its close competitors like Russia (RSX) and Iran

We should note here that Saudi Arabia derives more than 85% of its revenue from exports related to crude oil.

Stocks are already taking the heat off production

The graph above shows the month-to-date performance of Kosmos Energy (KOS). The US-based (SPY) upstream stocks of Kosmos and Denbury Resources (DNR) have fallen 26% and 48%, respectively, on a month-to-date basis as of January 26, 2016. These stocks operate with a production mix that’s greater than 90% in crude oil. On average, all the constituents of XOP that operate with a production mix that’s greater than 90% in crude oil fell by about 30.4% on an MTD (month-to-date basis). Notably, Anadarko Petro (APC) fell by 29% on an MTD basis.

So for investors in the energy sector, the next question should be this: After all this turmoil, how are these companies’ moving averages and analyst estimates looking? Continue to the next part to find out.

Continue to the next part to find out.

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