Make Big Money in the Oil Market By Calling Saudi Arabia's Bluff

[Ed. Note: Our resource maven Matt Insley has his finger on the pulse in the oil market better than almost anyone. And with a very important OPEC meeting coming up, he’s decided to clue you in to what he thinks Saudi Arabia is likely to do, ahead of the meeting. Read on…]

“Personally, I think the Saudis are bluffing,” the email from a colleague said.

“No way they can let oil fall much further…”

My colleague hails from Wall Street. He knows big money and big oil. Best of all, he’s got plenty of experience knowing how these type of big moves play out…

“On Wall Street, there’s always an ‘AXE’ on a stock,” he explains, “With stocks, the AXE is normally an investment bank. Everyone knows that investment bank takes care of a stock, to make sure that it doesn’t fall below a certain price. You earn your right to be the AXE by showing that you can control the price. If you can’t actually do it, someone else becomes the AXE. And you lose your power to set the price.

“It’s the same in the oil market,” he continues, “the Saudis are the ‘AXE.’ For all intents and purposes, Saudi Arabia and OPEC have controlled the price of oil for over a decade. The Saudis are not going to want to see what happened in the ’90s happen again. They lost control of the market and it took a decade to get control of it again. I don’t believe they are going to let crude go down too much further.”

With oil prices down by about a third over the past few months, it’s decision time for the Saudis, the “AXE” of the oil market.

Right now, they’re balking prices lower, with the specter of coming price drops and added supply.

From the outside, it appears the Saudis have a strong hand, too.

But I’m telling you right now, today, the Saudi action is nothing more than a calculated bluff.

The reason is simple…

You see, 10 days from now, on Nov. 27, OPEC holds its next meeting.

These cartel jamborees over the past decade are where the cartel gets together, smokes cigars and chokes the world’s supply of oil — to goose prices higher.

But this meeting will have a much different feel than meetings of the past. In fact, this meeting in particular will be of the utmost importance.

You see, OPEC member nations are facing the lowest price of oil they’ve seen for four years. Many OPEC member nations are struggling. After all, countries like Venezuela, Nigeria and Ecuador are feeling a real pinch with prices well below $100 a barrel.

Saudi Arabia, the big dog in the yard, is feeling the pinch, too.

But this big dog is playing a calculated game prior to the Nov. 27 meeting.

You see, if you want a bigger bargaining chip at the OPEC meeting and you’re the Saudis, all you need to do is hold a lit match over the proverbial barrel of oil (“They’ll do it!”). By making strong, publicized moves in the days leading up to this meeting — saying they’ll unilaterally lower prices and increase production — the Saudis are doing nothing more than making their poker hand look better to the rest of the OPEC cartel.

Maybe they want to increase their share of the OPEC quota? Maybe they want to control the outcome of the November meeting?

Truly, I’m not sure what logic the Saudis are using.

But I’m calling the bluff.

By the time we see a result from the Nov. 27 OPEC meeting, the bottom will be in for the oil market. Heck, the bottom may already be in!

Here’s my reasoning…

First off, oil prices aren’t dropping “that” much.

Right now, the market has all the reason in the world to be selling off as much as possible. The U.S. is bursting with oil. A Republican-controlled Congress should further ramp up U.S. oil production. Emerging markets and Europe are struggling. And the biggest OPEC producer is threatening a price war with the world.

See, when you add it all up, the expectations for oil are ugly. The Saudis are starting a price war? Geez. I mean, their “cost” to produce oil is probably around $20 — so there’s no real downside limit to the pain they could put on the market.

That’s about as bearish as you can get in the oil market.

All said, the market is dropping some pretty large hints that this Saudi action isn’t what it’s cracked up to be. After all, with all of the bearish news listed above, the price of oil is still rather close to $80 a barrel. Meanwhile, shale producers that pulled back on the latest Saudi announcement are already starting to recover.

This has all the markings of a bottom in the price of crude. The outlook is a bear’s paradise.

Regards,

Matt Insley
for The Daily Reckoning

P.S. When the bears are out, it’s time to go bull hunting. That’s the trader’s mindset I try to convey. And it’s also the reason that I’m confident in the recent options plays I added to the portfolio. In today’s Daily Reckoning email edition, I gave readers a chance to discover those options plays for themselves — and all the potential profits that come with them. Click here to sign up for The Daily Reckoning email edition, for FREE, right now.