Profit From Saudi Arabia’s Secret ‘Oil Weapon’

Early last month I stepped off a plane coming back from Colombia and found that energy markets were in a panic.

The trigger was OPEC, which announced on November 27 that its member nations would not consider cutting oil output. The result was an 8.4% drop in West Texas Intermediate crude prices the following day.

This energy selloff shouldn’t be news to any of our StreetAuthority Daily readers. In fact, just a couple of weeks ago, I told you about three ways to profit from cheap oil. And even if you didn’t read that issue, I’m sure you’ve noticed how cheap prices have been at the gas pump.

#-ad_banner-#Many observers were expecting a production cut from OPEC. They reasoned that with oil prices having dropped from over $100 per barrel to near $70 preceding the announcement, the world’s largest producers would make a strong move to protect their profits.

Plenty were caught off guard when OPEC did not cut protection, hence the steep drop in oil prices following the announcement.

There are a number of reasons for OPEC’s surprise move. One of the largest reasons being cited in the mainstream financial press is competition.

OPEC has been feeling the heat lately from surging oil production coming out of North America. This not only includes shale oil from U.S. plays like the Bakken and Eagle Ford, but also oil sands production from Canada.

In fact, just recently, the European Union voted to allow the import of oil sands crude. That may have prompted OPEC to make a protectionist move and keep production going in order to try to drive down prices. Producers like Saudi Arabia and Kuwait are hoping to put their competition out of business (or at least force some higher-cost producers in North America to cut output).

But there’s another important factor at play here… something I like to call the “oil weapon.”

Many of my international contacts — some of the brightest and most successful fund managers, analysts, and individual investors in the sector — are telling me that there may be some targeted, politically-driven motives behind this move as well.

You see, my colleagues theorized that OPEC is using oil prices like a weapon — and that this is what prompted the recent Saudi moves in maintaining high oil production.

And this oil weapon is pointed squarely at none other than Russia.

Russia has been one of the few nations supporting Syrian strongman Bashar Al Assad. Russian supplies and military backing have been helping Assad fight his much-publicized civil war — the one that has abetted the spread of groups like ISIS.

In Iran, Russian influence has been more subtle. But recent moves like support for Iran’s controversial nuclear program have shown that Putin is intent on increasing his activity there, too. All of this is worrisome for Saudi Arabia.

All this amounts to the Saudis turning its most potent weapon on Russia, hitting the country right where it hurts most: in the pocketbook.

You see, we often forget that an estimated 16% of Russian GDP comes from the oil sector — with 52% of federal budget revenues coming from crude. And that means the recent drop in prices has hit Russia’s economy hard.

All of that hurt may have been exactly what the Saudis were looking for. They’re willing to take a little pain in exchange for a stronger position politically.

I tend to agree with this theory, and have made the case for this in the January issue of my premium resource advisory, Scarcity & Real Wealth.
But I think that strategy is unsustainable for the long term because of internal dynamics within OPEC itself.

The thing is, a rich nation like Saudi Arabia can afford lower oil prices. Even with cheap oil, the government is still making ample profits — more than enough to keep the country humming along.

But that’s not the case for all OPEC producers.

Look at a major oil-producing nation like Iran. Estimates are that the cash-strapped Iranian government needs oil prices around $100 per barrel just to balance its budget. At current prices, it’ll be feeling a lot of hurt.

Venezuela is another striking example. The country depends on oil for 96% of its exports, experts think GDP could contract by as much as 4.5% this year, and a default on its debt is also possible.

I expect this will eventually lead to internal pressure within OPEC to curb production and help lift prices.

Bottom line, I think this is all temporary.

I expect we could see a quick move by the Saudis to cut crude production in the first half of 2015 and shore up prices — which would likely trigger a surge of buying in the energy markets. After all, today’s $53 crude hurts OPEC deeply — and there’s no reason to believe they want to see low prices for the longer term.

In the meantime I’ll be shopping around for undervalued energy stocks. There are plenty out there.

Many of the stocks I’ve been recommending lately have little to do with where oil prices are at. In fact, as I showed in the article mentioned earlier, some even benefit from cheap oil.

Take a firm like LyondellBasell (NYSE: LYB) for example. This is a company that buys petroleum products as inputs for its petrochemicals business. Thus, when oil is cheap, LyondellBasell’s profits actually increase. And yet, the stock dropped 12% following the announcement, to $78.86, on panic over oil prices. It’s currently trading just above $80, still far below my target price of more than $140.

The point is, regardless of what happens with Saudi Arabia and the rest of OPEC, I’m searching for opportunities in the energy sector in the form of companies that have been unfairly lumped in peers that are more dependent on the price of oil. Once the market realizes that the baby has been thrown out with the bathwater, I expect we’ll see nice gains in 2015.

I travel the world searching for opportunities like this. That’s why I’m so excited to tell my readers about what I think could be the world’s first $1 trillion boomtown. Several oil and resource-mining companies are poised to make billions from this under-the-radar hotspot. Simply put, this could be the biggest opportunity I’ve seen in my lifetime. To get access to some of the names and ticker symbols of these companies, follow this link.