Pakistan Stock Exchange index up 3.09%WoW

The pre-budget rally continued throughout the week ended May 17, 2024 with Pakistan Stock Exchange benchmark index closing at its historic high, as the bears failed to seize control at every turn and investor’s confidence remained high, driving the market to sustained gains. The benchmark index closed at 75,342 points on Friday with a gain of 2,257 points, up 3.09%WoW.

The market's bullish momentum is mainly attributed to recent talks with the IMF proceeding smoothly, without any hiccups.

Further, SPI weekly inflation is consistently on downward trend for the past five weeks, indicating a tapering down of CPI figures for the ongoing month.

Prices of petroleum prices, MS and HSD were decreased by PKR15.39 and PKR7.88 per liter, respectively, in the last fortnightly review.

Yields in the mid-week T-Bill auction also declined slightly.

Of significant importance, current account for April 2024 posted another surplus of US$491 million, lowering 10MFY24 deficit of mere US$202 million. With just two months left, FY24 CAD is expected to close substantially below the IMF’s forecast of US$3 billion.

Confirmation of the withdrawal of tax exemption from the FATA/PATA region has instilled overall positivity in the steel sector.

Alongside, additional revenue measure recommendations from IMF team comes on surface including proposals to increase withholding advance tax across automobile, real estate, and agricultural sectors.

Average trading volumes were down by 22.7%WoW to 554.50 million shares, as compared to 717.34 million shares traded in the earlier week.

Other major news flows during the week included; 1) during H1FY24, driven by agri sector, real GDP grew by 1.7% as per the central bank, 2) foreign investment peaked by 84% to 30-month high and 3) Ministry of Finance refused to extend subsidy on urea fertilizer due to financial snags.

Top performing sector were: Automobile parts & Accessories, Engineering, Synthetic & Rayon, Real Estate Investment Trust and Woolen, while Cable & Electrical goods, Close-end Mutual Fund, Transport, Tobacco and Power Generation & Distribution were amongst the worst performers.

Major selling was recorded by Banks/DFI with a net sell of US$9.85 million. Foreigners absorbed most of the selling with a net buy of US$14.94 million.

Top performing scrips of the week were: THALL, INIL, PSX, PKGP, and ISL, while top laggards included: PAEL, PTC, AGP, KEL, and NPL.

Market is anticipated to remain focused on FY25 budget related news in the near term. Overall, some profit taking can be expected with the index at its record high. However, with foreign buyers consistently purchasing, the rally is expected to continue amidst the market's attractive valuations.

The upcoming MPC meeting, scheduled just after the budget, will also be in the limelight.

Despite real interest rates being significantly positive, new taxation measures could pose a risk to the inflation outlook and possible start of monetary easing.

 

Finally United States kneels down before Iran

The United States announced to re-impose sanctions on Iran. President Donald Trump unilaterally pulled his country out from an agreement signed by big powers with Iran. The US government threatened countries to bring down their oil imports from Iran to zero or face similar sanctions. Many critics fail to understand the logic of President Trump as they strongly believe that he will not be able to achieve much by re-imposing sanctions.

Some analysts say that the US administration wishes to maintain a delicate balancing act with the waivers by ensuring the oil market has sufficient supply and avoid a politically damaging spike in fuel prices. The US also wants to ensure that Iran doesn’t collect enough revenue that the US sanctions become irrelevant. Countries that get waivers will be required to pay trough an escrow accounts in their local currency. That means the money won’t directly go to Iran, but will be allowed to use it for buying food, medicine or other non-sanctioned goods from its crude customers.

Let us first of all find the rationale behind re-imposition of sanctions on Iran by the US. I will prefer to use a quote. It says the re-imposition of sanctions on Iran by the US are aimed at achieving two targets: 1) quashing its nuclear ambitions and its ballistic missile program, but also 2) weakening its financial strength to support groups fighting proxy war in Syria, Yemen, Lebanon and other parts of the Middle East”.

Some analysts say that the US has imposed proxy war on the above stated countries for establishing its hegemony in Middle East and North Africa (MENA). The US efforts are aimed at weakening these countries so that they don’t become a potential threat for Israel, which has faced humiliating defeat in Lebanon. Hezbollah, a Lebanon-based resistance group smashing Israel’s military supremacy is often termed a terrorist outfit and alleged for receiving funds and military hardware from Iran.

No sooner did these sanctions became effective, the US confirmed granting waivers to eight countries, allowing them to continue to import oil from Iran for the next six months. The countries include South Korea, Japan, India, China, Turkey, Taiwan, Italy and Greece. The waivers will facilitate these to continue to import oil, although there is a great deal of disagreement among analysts over how much Iran’s exports will fall.

This waiver means that the supply situation will ease further. Reportedly Iran’s oil exports will stabilize at around 1 million barrels per day, and could even increase again in the coming months because Japan and South Korea have hardly been buying any Iranian oil lately. Receiving the waivers will allow them to continue buying. To be sure, not everyone agrees on this point, some believe the hawkish government in Washington will make other efforts to curb Iranian oil export.

Announcement of waivers, are a defeat of the US, seemingly backtracking a policy to cut Iran’s oil exports to zero. However, the Secretary of State Mike Pompeo continues to play the famous US mantra, “maximum pressure” campaign will continue and that the administration hopes to get to zero. The waivers were granted to countries that “need a little bit more time,” he said. 

I am also obliged to refer to what has been said by Professor Frank N. von Hippel, former assistant director for national security in the White House Office of Science and Technology. He said that it was a terrible mistake for the Trump Administration to pull the US out of the agreement between the P5+1+EU and Iran, commonly referred as Joint Comprehensive Plan of Action (JCPOA).

“The US has lost credibility with the other permanent members of the UN Security Council, Germany and the EU”. He also warned, “If Iran reacts by ending its own compliance with the JCPOA, we might be on a path to war. The US does not need another unnecessary and costly war”.

Geopolitics to drive oil prices once again

I have picked up some news items from Oil & Energy Insider that support my hypothesis that US Shale output will continue to rise but some of the oil producing countries may become victim of commotion, anarchy and proxy wars. This will automatically reduce the supplies from these countries and there will be no pressure on OPEC to extend output cuts anymore.

Energy sector analysts are desperately awaits the outcome of OPEC’ meeting in Vienna scheduled for 25^th May. While the overwhelming expectation is that the cartel will agree on a six-month extension of the production cuts. However, now top OPEC officials are wondering if it will be enough. OPEC’s monthly report revised expected US shale growth sharply upwards, predicting output to increase 64 percent more than originally expected. That equates to projected growth from US shale of 950,000 bpd this year. OPEC fears that an extension will boost prices just enough to allow shale companies to lock in hedges once again, ensuring another wave of supply.

Tensions between Libya’s Presidential Council (PC) and the National Oil Corporation (NOC) are growing. The PC, which presently functions (that could change any day) as the head of state and military, and which is responsible for selecting members of the government, is ostensibly in control of investment decisions concerning Libyan oil. It was given this power via a resolution passed earlier this year. But the cracks in this set-up are already showing. The NOC is now accusing the PC of using the resolution to give German Wintershall a free pass in terms of compliance terms that it had agreed to with the NOC back in 2010. The NOC is now saying that the PC’s liberal stance on Wintershall is costing Libya $250 million because the dispute between the NOC and Wintershall has led to the shutdown of 160,000 bpd in production capacity. So, what does this mean for Libya? For the moment, production continues to rise. It’s now jumped to 780,000 bpd for the first time since 2014. And while elsewhere such a dispute might not rock any serious boats, in Libya this is the stuff of bloody changes in power. The NOC and PC are only hanging on to a modicum of control in the face of numerous militia factions that shift alliances with the wind. If the PC refuses to meet the NOC’s demand to revoke the resolution that gave it control over investment decisions, we could very easily see another shift in power in Libya. The NOC is bent on raising production a million bpd by the end of the year, and if it feels the PC is getting in its way, it may have the power to sideline it. The bottom line: The market responds in a knee-jerk fashion to any increase in production in Libya, but it’s important to keep in mind that Libya’s oil output on any given day is fragile at the very best.

For the first time in history, Tunisia has deployed armed forces to guard its oil and gas fields in the south, under threat from ongoing protests. Protests in the south have been going on for several years now, as the North African state tries to turn its economy around in the aftermath of the 2011 Arab Spring. But so far, planned government reforms have not been met with much enthusiasm. The south of the country still feels marginalized, and high unemployment—particularly among youth—and a perceived misdistribution of resource wealth are fanning some dangerous flames. Resource wealth, by regional comparison, is pretty low, but it’s enough to get the Tunisian youth up in arms. In 2013, Tunisia’s crude oil production hit a historic low of 60,000 bpd. By the end of 2016, it had fallen to 49,000 bpd. Right now, media puts production at 44,000 bpd, and if the youth is not appeased, even this paltry resource volume could be at risk.

Kenya’s first planned oil exports are also at risk. Residents of Kenya’s Turkana South have threatened to block the planned transportation of crude oil to Mombasa. Transportation of the oil from the Turkana fields is expected to start early next month, but locals are threatening to block it to buy time for more negotiations on revenue-sharing, job allocation and infrastructure deals. In mid-March, Kenya greenlighted a crude oil export agreement with Tullow Oil, Maersk International and Africa Oil, with pilot exports slated to start in June in a major milestone for the East African country, which was put on the oil map with a massive 2012 discovery. The companies have stored 70,000 barrels of crude oil, which will be used for part of the pilot program. Three companies announced that they will immediately begin transporting crude oil from the South Lokichar field in the prolific Turkana basin to the Kenyan Petroleum Refineries Limited (KPRL) at the port of Mombasa. From there, it will be exported to market in June—that is, unless protests get in the way. The South Lokichar field is being explored and developed by a joint venture between three companies. It is estimated that there are about a billion barrels of oil in the Lokichar area. 

Pakistan Stock Market witnesses over 37 percent decline in daily traded volume

Trading at Pakistan Stock Exchange (PSX) remained lackluster for the large part of the week. During the week ended 7^th Aptil’17, the benchmark index closed at 48,156 points with average daily turnover during the week falling 37.36% WoW to 155.75 million shares. Volume leaders during the week were:  ASL ANL, BOP, BYCO and TRG. Key news flows during the week were: 1) headline inflation for March’17 rising to 4.94%YoY, 2) GoP raising petroleum prices, 3) INDU unveiled investment plan of Rs3 billion for debottlenecking of its paint shop, 4) IMF concluded its consultation with GoP, opining cautious stance on fiscal and external account while maintaining 5% GDP growth target, 5) Commerce Minister hinting disbursal of the first installment under the Rs180 billion textile package shortly and 6) SSGC approved  Rs64.9 billion additional gas pipeline development project to transfer 1.2bcfd RLNG from Bin Qasim to Sawan  with expected COD October’18. Stocks leading the bourse were: SSGC, INDU, MEBL, LUCK, and HCAR, while laggards were: NBP, NCL, AICL, ENGRO and SNGP. Foreign interest was positive during the week with net inflow of US$9.25 million compared to US$19.04 million net outflow a week ago. With high political uncertainty and delayed in implementation of in‐house financing product, market is expected to remain under pressure. However, commencement of results season may lend some support to the market. On the global front, recent U.S missile attack at Syria escalated tensions in the Middle East can that is likely to push crude oil prices higher, which can lend support to market.

The IMF recently concluded its Article IV staff‐level discussions with Pakistan, adopting a cautious tone on the country's ability to sustain recent macroeconomic gains. While similar to earlier reviews lagging fiscal and reform implementation efforts were counted as potential disruptive factors, looming external account threats also became a highlight. In this regard, the Fund has sharply increased its FY17 current account deficit projection to 2.9% of GDP (1.2% of GDP in FY16) on weak trade dynamics. On the fiscal front, GoP is expected to miss its deficit target of 3.8% of GDP with IMF forecasting the same at 4.1% owing to slow revenue collection (Rs2.2 trillion in 9MFY17 against Rs3.6 trillion target for FY17). Urging fiscal consolidation and greater tax collection, the Fund has also highlighted lack of progress on structural reforms in the energy sector. On a positive side, GDP growth for FY17 is expected to rise to 5.0% as compared to 4.7% for FY16 on CPEC led investment. IMF has appreciated controlled inflation levels, though advising a prudent monetary stance keeping in view fiscal and external risks.

Due to high political uncertainty, Pakistan market witnessed 0.8% MoM erosion during March'17, trimming down its CYTD return to a mere 0.7%. While foreign selling continued unabated during the month (FIPI outflow of US$22.8 million in March'17), participation of local players also remained lean, with volumes coming down by 31%MoM. Buying activity of Mutual Funds came down to around US$19.1 million as compared to US$47.9 million and US$44.1 million in February'17 and January'17). Banks and Individuals sold US$16.1 million and US$35.1 million worth of equities respectively. Barring Textiles, all main-board sectors posted negative returns with the highest decline seen in Cements and the index heavyweights Oil and Gas and Commercial Banks. Going into April'17 is likely to hold key importance in determining the market's direction. In addition, other points of significance include: 1) foreign flow trend a month prior to inclusion in MSCI EM index next month, 2) commencement of results season, 3) preliminary budgetary news flow and 4) inflation number this month to set the tone for interest rate hike during the year. 

Upsides in HASCOL are due to superior volumetric growth (CY17‐21 CAGR of 9.7%)  outpacing the industry, with requisite CAPEX dovetailing an aggressive retail push (adding 16 pumps per quarter for CY16) and storage infrastructure (planned addition of 350,000MT operational by 1QCY18). In this backdrop, AKD Securities has raise its CY17‐19 earnings by 11%, on the back of revised volumetric growth and increasing long term CPI assumption to 4%. However, with ambitious growth targets, the risks from a volatile oil price environment and associated inventory losses are hard to rule out. Ramping up of supply is also expected to strain liquidity while a commensurate increase in below the line expenses may drag profitability. Compared to listed peers, HASCOL’s books have better liquidity with room available to handle planned CAPEX. At current levels, the market seems to be under pricing growth.

Pakistan Stock Exchange witnesses 30 percent decline in daily traded volume

The benchmark index of Pakistan Stock Exchange (PSX) once again failed in crossing 50,000 barrier but managed to close at 49,556, ending its last 10-week bullish run. This slow down could be attributed to rumors of action by SECP against brokers that were warned recently over compliance issues primarily related to financing. Activity at the bourse tapered almost 30%WoW with average daily traded volume declining to slightly less than 370 million shares. The volume leaders were: KEL, TRG, DSL, LOTCHEM and ASL. Key news flows during the week included: 1) GoP initiated the process for sale of its 18.39% shareholding in MARI at 7.5% discount to the closing market price of MPCL shares of 27^th January this year of Rs1,402.9/share, 2) Sindh Bank Limited and Summit Bank begun due diligence process for merger, 3) Cabinet Committee on Privatization (CCoP) deferred the divestment of GoP's 5% stake in OGDC on the stock exchange until its share price touches Rs200/share, 4) SBP sold Rs589.7 billion worth of papers at the MTB auction held on 1^st February, where cut off yields on 3, 6 and 12 months increased and 5) GoP raised prices of petroleum products. Performance leaders for the week were: LOTCHEM, PSO, EPCL, ENGRO and MTL; while laggards included: APL, FFBL, INDU, MCB and FATIMA. Foreign participation continued its negative trend with US$15.31 million outflows compared to US$13.67 million a week ago. Going forward, the market is likely to take its direction from the ongoing results season where strong earnings growth by Banks, Cements and Autos is likely to provide impetus to market performance. Major results announcement next week includes MCB, ABL, PRL, PTC, CHCC, LOTCHEM and EPCL.  

Engro Fertilizer (EFERT) is scheduled to announce its CY16 financial results on Wednesday 8^th February. Analysts expect the Company to profit after tax of Rs10.79 billion (EPS: Rs8.11) for CY16 as compared to net profit of Rs15.03 billion (EPS: Rs11.29) for CY15, a fall of 28%YoY. The decline in earnings is expected on the back of: 1) gross margin (GM) sliding to 33.2% (including subsidy) on account of reduction in urea prices (down 9%YoY) due to depressed farm economics and low international price down 28%YoY to an average US$213/ton during the year under review, 2) 73%YoY decline in other income on account of reduction on term deposits and 3) 28%YoY decrease in finance cost on account of swift  deleveraging and low interest rate environment. However sequentially, analysts expect an increase of 79%QoQ in profit to Rs5.13 billion (EPS: Rs3.86) for 4QCY16 on the back of 61%QoQ growth in topline to Rs30 billion due to the increase in urea/imported DAP offatke to 630,000/292,000 tons due to Rabi season. Along with the result analysts expect a cash dividend of Rs2.50/share that could take full year payout to Rs6.9/share.

Pakistan’s largest oil marketing company, Pakistan State Oil (PSO) is scheduled to announce its 1HFY17 result on 6^th February where analysts expect it to post earnings of Rs9.67 billion (EPS: Rs35.61) marking an increase of 44%YoY led by 1) inventory gains of Rs1.2 billion (Rs4.42/share) as against inventory losses of Rs0.91 billion (Rs3.39/share) for 1HFY16, and 2) a 20%YoY growth in overall volumes.

A rather smaller company, HASCOL is also scheduled to announce CY16 earnings of Rs1.31 billion (EPS: Rs10.84) up 15%YoY, where the normalization of taxes is likely to erode profitability significantly. Staggered rise in global oil prices and increase in HSD/Mogas retail prices, with a 13% fall in additional levies translate into higher prescribed price pass through (increasing 6.5%). On quarterly basis, 4QCY16 earnings are expected to grow by 6%YoY to Rs404 million led by 46%YoY growth in total volumes. Full year earnings are likely to be accompanied by a final dividend of Rs3.00/share that could take full year payout to Rs6.5/share.

Pakistan Stock Exchange inching closer to 50,000 mark

The benchmark index of Pakistan Stock Exchange (PSX) continued its upward journey towards 50,000 mark during the week ended 6^th January 2017. It posted a gain of 2.58%WoW, and closed the week at 49,038. Exercising of pricing power by cements, expectations of turnaround in margins for steels, expectations of the textile policy and the Supreme Court's move to re‐examine beneficial owners of holding companies, helped boost a broad based rally where average volumes for the week were up 42.3%WoW, 408 million shares. Key new flows included: 1) cement dispatches grew by 8.65%YoY to 19.81 million tons in 1HFY17, led by growing demand in the domestic market, while local cement sales increasing by 11.07%YoY during the period, 2) the GoP decided to keep petroleum prices unchanged for two weeks during the ongoing month, 3) domestic petroleum products sales during the 1HFY16 increased by more than 18% to 13 million tons. POL sales during December'16 rose to 2 million tons, reflecting a growth of 23% YoY/1.8%MoM and 4) news reports stated that KEL has shelved plans for converting its BQPS‐1, with 420MW capacity to low‐priced coal after the utility failed to secure cost‐effective tariffs from the regulator. Stocks outperforming over the week were: ASTL, FFC, NCL and PTC, while laggards were: MEBL, AGTL, EPCL and KEL. Volume leaders were: DSL, ASL, KEL and, BOP. News flows and preliminary data on output figures from OPEC nations is expected to greatly sway global oil prices. While the index is at all‐time highs, profit taking cannot be ruled out. In the run‐up to results season, dividend paying stocks are expected to remain in the limelight. 

Recent recovery in international urea price to US$240/ton (up 42% since July'16) presents a lucrative opportunity for local manufacturers to export excess urea inventory (November'16 urea inventory in the system stands reported at 1.45 million tons, down 15%MoM/ up 56%YoY). Weakening demand (poor farm dynamics) along with record level urea production has led to high inventory build‐up in the system which is likely to persist in the near‐term with urea inventory forecasted at 1.2 million to 1.8 million tons by the end of CY16/CY17 respectively. In this backdrop, the GoP is expected to allow export of 0.8 million tons of urea in line with a proposal of Ministry of Industries. In such a scenario, Engro fertilizer remains a key beneficiary on account of its low cost/bag and healthy market share, followed by FFC owing to market leadership in urea sales.  

Robust growth in demand for POL products, underpins December'16 total volumetric offtake of over 2 million tons, climbing 1.4%MoM/21.6%YoY. Furnace oil sales rose by 35.5% MoM/30.4%YoY, followed by HSD sales up 23.7%YoY but dipped 20%MoM, whereas MOGAS demand continued to rise (growing 16.7%YoY), yet remaining tepid sequentially (0.3%YoY increase). 1HFY17 volumes point to 18%YoY growth in total volumes, led by 20%/16%/20%YoY growth in FO/HSD/MOGAS offtake. The picking up of volumes at this pace is likely to slow. That said, 2HFY17 is likely to be slightly better (5-year average 2HFY sales make up 53% of annual offtake), led by strong growth in retail fuels from May’17 onwards. Premium fuels sales continue to soar, where 1HFY17 sales of 29,547 tons marks a 37%YoY increase, making FY16 full year sales of 41,067 tons pale in comparison. Renewed force to regain market share remains prominent in PSO's numbers, where the OMC is slated to benefit from its vast retail network.

According to an AKD Research report, cement prices in the North Region have likely been increased in the range of Rs10‐20/bag whereas the cement prices in the South Region remain unchanged and are not expected to be raised anytime soon. The brokerage house believes that the hike in cement prices (not incorporated in base estimates yet) should allow cement manufacturers to maintain margins whereas gross margin of AKD Cement Universe is likely to improve by 54 bps/100 bps to 38.76%/43.77% in FY17/FY18.

US shale producers to gulp Saudi market share of oil

After OPEC lead by Saudi Arabia and Russia arrived at a consensus to contain oil production, I wrote that the real threat for Saudi Arabia was not Iran but the US shale producers. Some of my critics said that I suffer from US-phobia and try to portray whatever happens on the earth as part of US conspiracy.

This morning when I read a news from Reuters about increasing number of rig counts in the US, it gave me a feeling that I was not mislead by the western media but right in saying that with the hike in crude oil price, rig count in the US would jump dramatically.

According to the Baker Hughes, US energy companies have added oil rigs for an eighth week in a row as crude oil prices rose to a 17-month high. During the week ended 23^rd December 2016 the total rig count went up to 523, the most since December 2015.

The report also said that by May this year rig count had plunged to 316, from a record high of 1,609 in October 2014. This decline could be attributed to crude oil price that plunged to US$26/barrel in February 2016 from US$107/barrel in June 2014.

The report also indicated that oil and gas rigs count would average above 500 in 2016, around 750 in 2017 and above 900 in 2018. This confirms the news that while other oil producing countries curtailed fresh investment, US shale producers continued production without filing bankruptcy under Chapter 11.

The Reuters news should be an eye opener for oil producing countries, particularly Saudi Arabia, Iran and Iraq. They should not be the first to cut production and let the crude oil price go up. If they want to keep US shale producers under pressure, they will have to keep crude oil price below US$35/barrel. This may be pains taking but the only option to bring down the number of active rigs in the US. They should also keep an eye on E&P companies filing bankruptcy under Chapter 11.

In response to this I have received following response from Mark S. Christian, ​President, Chris Well Consulting.

I read your article, "US Shale Producers to Gulp Saudi Market Share of Oil". This article implies a skyrocketing North American rig count, but the U.S. did not add 523 rigs during the week ending December 23, 2016. In fact, the rig count in the U.S. is growing only modestly at the moment. Last week the U.S. added only 16 rigs in total - 13 rigs exploring for oil, and 3 rigs exploring for natural gas. This brings the total rig count to 523, but your article implied 523 rigs were added during this past week, and that is not correct. Maybe it was an editorial mistake by the publisher - which said: "During the week ended December 23, 2016 the total rig count went up by 523, the most since December 2015".It should have said ..."the total rig count went up to 523", implying the aggregate total reached this number.

I have been in the well-servicing business for more than 30 years and during this time operated workover rigs.​ A well service company provides well completion and maintenance services and​ demand for rigs go up and down with the oil price. When the oil price recently fell below $30USD/Bbl - my​ workover rigs were sitting idle. Oil companies could not afford to work on their wells, so they let them go offline. As prices moved above $45/Bbl, oil companies started calling again - and our workover rigs slowly began moving back into the field. The same holds true for American drilling rigs. Higher prices = higher U.S. rig utilization.

This supports your hypothesis that - 1) the U.S. rig count is a threat to the Saudi-led production cuts and 2) American shale may be a longer term threat to OPEC's market position.  Your warning to Iraq, Iran, and Saudi that raising prices via production cuts is not in their long-term interest, is correct, although I surely hope they do not change course.

Saudi guided OPEC into underestimating the staying power of shale-focused oil companies in the United States who were built on junk bonds and high-interest debt. Most were developing fields that were not economic below $60/bbl - and the Saudi's knew this. Riyadh miscalculated by expecting these financially weak companies to fold up quickly once prices fell below lifting costs. That did not happen, many went into Chapter 11 bankruptcy which allowed them to discharge their bond debt and emerge with a cleaner balance sheet.

El Naimi expected very steep decline curves for U.S. shale production, however, this did not materialize and North American shale production turned out to be more resilient than even the American oil companies forecasted. El Naimi also expected the shale market to collapse on itself as he viewed U.S. shale production to be inefficient. It was - until market forces went to work and held the unconventional resource market together much longer than the Kingdom's cash reserves or El Naimi's ideas were able to bear. 

In November 2014, the bottom fell out of the US oil market and caused U.S. service costs to deflate - my rig rates fell 30% in 60 days. What most outside the U.S. don't understand about the American market is when things are good we can ramp up drilling and well completion quickly​, but when things turn bad - cost cutting and a lazer-focus on efficiency enable us to sacrifice profits and survive until the market rebounds.

El Naimi's low-price strategy forced American E&P's to cut wasteful spending and exercise more discipline over their profit and loss. This helped​ U.S. production become more efficient - and lowered U.S. lifting costs. Now fields that were unprofitable when crude prices fell below $60/bbl are profitable at $45/bbl.

The big question that everyone wants to know, (and relate directly to your warnings to OPEC in your recent article) is: How long will it take the​ U.S. to ramp up production enough to offset OPEC's production cuts? Can American production actually grow large enough to begin driving global oil prices down? If that happens, OPEC will no longer be the swing producer we have relied on for so many years to correct bubbles in the market.

If the U.S adds 16 rigs per week over the next 52 weeks - the resulting increase of 832 new rigs in the next year will not affect America's oil production to an extent it will make a noticeable change to the global oil market. Over the years I have noticed that the U.S. market needs 2-3 years of booming exploration and development activity before the global market takes notice. I do agree with your assumption that production growth in the U.S. may swallow up Saudi's recent production cuts, but it will take 24-36 months before many people take notice.

Freezing oil output is a hoax call

Once again there is an uproar that oil producers want to talk about freezing output. It sound very funny that while the big producers are not willing to curtail their production, they want smaller producers to reduce their output.

It is on record that Saudi Arabia has persistently increased its output, but wants Iran to agree to freeze output without reaching its pre-sanction output level. It is on record that lately Saudi Arabia has been pumping one million barrels daily above its historical average.

On the face value it appears that the rift between two OPEC members, Iran and Saudi Arabia is not a complete fallacy. Saudi Arab is not willing to curtail its output because it is afraid of United States and Russia, which are adamant at causing damage to its desire to become a regional superpower, surpassing Iranian might.

Both United States and Russia are fighting a proxy war with Saudi Arabia in Syria and Yemen. Both the super powers know very well that the only way to cause dent to Saudi lust for wars is by reducing its petrodollar income.

In my humble opinion if Saudi Arabia cuts its production and price goes up by one dollar per barrel, it will not be a major loser. However, this may pave way for the US shale producers to increase their output. But a point must also be kept in mind that the US shale producers have not gone bankrupt and continue to pose a major threat to Saudi Arabia.  

Though, it may sound a little divergence from the topic, I just can’t resist from saying that the Zionists have completely brain washed Saudis who openly say that Iran is a bigger threat as compared to Israel. Having belief in this absurd idea, Saudi Arabia has emerged as the biggest buyer of arms.

I would also say that Saudis have enough petrodollars, if they stopped buying arms. Their animosity with Iran has been a cause of instability in the region but more importantly buying arms has not given it supremacy over its rival.