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Cramer: Saudi Arabia could crush oil next year

Every time Jim Cramer hears that OPEC is going to get together, as they will this Friday, he hears dozens of stories about how other members of OPEC will put pressure on Saudi Arabia to scale back production.

But with its production running at an all-time high of some 11 million barrels a day, could that just be a pipe dream?

"Saudi Arabia's minsters aren't likely to be moved, because they are thinking about market share, and so far they really haven't picked up much — least of all in the United States, where they most want it," the "Mad Money" host said.

Cramer thinks this is because in the U.S. it has only been a few weeks where oil output has not increased. Meaning if the Saudis wanted to put a dent into U.S. production in 2015, they failed.

But next year is a different story.





SeongJoon Cho | Bloomberg |Getty Images
"If they keep pumping, the Saudis can crush the U.S. oil industry, which has been their goal from the start" -Jim Cramer

Cramer believes that the low price of oil will really hit home next year, because the hedges will come off for many large U.S. oil producers. Banks did not deny credit to many of the cash-strapped oil companies this year because the companies were able to figure out how to pump more oil with less money.

Beyond that, though, many companies had hedged their production at very high prices, including prices from before the collapse in oil. So, the banks had no reason to deny them credit.

This coming year, many oil companies will be far less hedged than before, and the prices they will be hedged against will be much lower.

"2016 will be the year of the credit crunch in the oil industry, especially if crude keeps plummeting like it did today," Cramer said. (Tweet This)

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The Saudis know these hedging strategies; they know that if they can just keep pumping for another year, then the hedges will go away, and so will the credit lines.

"If they keep pumping, the Saudis can crush the U.S. oil industry, which has been their goal from the start," Cramer said. (Tweet This)

Cramer thinks it might not even take a full year before enough the hedges disappear and domestic production cuts back. At that point, Saudi Arabia could change its strategy.

And while there are some worries that Saudi Arabia is a cash strapped economy, the budget issue does not appear to be a pressing matter to Cramer. He thinks they are swimming in both oil and cash.

This is why Cramer expects the Saudis to keep the price of oil low, as it will cut into U.S. drilling 12 months from now. After all, if Saudi Arabia were to let the price of oil go back up that will allow for more hedges to come back on and U.S. producers to buy another year of production.

"That is the exact opposite of what the Saudis want, so why on Earth would they allow it to happen?" Cramer said.

Correction: This article has been updated to reflect OPEC production of 11 million barrels a day.

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