The real reason OPEC didn't cut production...

 Things are looking grim for oil...

Oil got crushed after the Organization of Petroleum Exporting Countries (OPEC) announced Friday it would maintain production and let the market determine oil's fair price.

That sent oil prices to their lowest level in five years. Brent crude oil – the international benchmark – is trading for $70 per barrel... down from $115 in June.

West Texas Intermediate (WTI) crude – the domestic benchmark – is near $66 per barrel... a 39% fall since June...

 OPEC is an economic cartel formed to coordinate policies among 12 oil-producing countries. OPEC's member countries supply about 40% of the world's oil, including Saudi Arabia, Venezuela, Iraq, Nigeria, and Qatar.

Cartels like OPEC exist to keep the prices of specific resources high. And for the past 40 years, OPEC has done just that.

Every time oil prices drifted down, OPEC member countries reduced production to help prices rebound. But so far, that's not the case today.

 Iran and Venezuela requested OPEC members collectively reduce production by 30 million barrels a day. Low oil prices are tough on U.S. shale producers... But they're cause for economic disaster in countries like Venezuela.

Kim, who recently visited Venezuela, is bearish on the country's future prospects. As he wrote in the November issue of Global Contrarian...

Even if Venezuela's pressing political and macroeconomic problems were somehow solved tomorrow, the country still faces more structural challenges than most countries will experience over the course of a few generations. For starters, revenues generated from oil account for around half of the government's budget – and all of its foreign currency revenues. But the price of oil is down by around 30% over the past five months – to around $76 a barrel today. The Economist magazine estimates that Venezuela's government budget breaks even at $120 per barrel of oil. So unless the price of oil picks up sharply soon, Venezuela is facing a fiscal crisis on top of the ongoing currency crisis. The country is running a fiscal deficit of 14% of GDP, which is one of the highest in the world. The economy will shrink by an anticipated 2.9% this year. And Venezuela's lack of economic diversification means that it has no other avenues to raise export revenues, address its fiscal crisis, or jump-start economic growth.

 In an e-mail this morning, Kim told me that lower oil prices mean things will deteriorate even faster in Venezuela. He noted the black-market exchange rate is now 153 bolivars to the dollar (up from 100 when he was there last month). As he wrote...

It's a matter of time before the government defaults on its sovereign bond... Things are getting grimmer by the hour.

 This time around, one OPEC country is holding out – Saudi Arabia. Ali Al-Naimi, the country's oil minister, lobbied to maintain current production levels to compete against U.S. shale producers... even though OPEC has exceeded its internal production target for six consecutive months, pumping out more than 30 million barrels per day (bpd), according to Bloomberg.

Why would Saudi Arabia agree to lower oil prices, which puts pressure on Saudi Arabia's economy and wrecks poorer OPEC nations like Iraq and Venezuela?

Stansberry Resource Report editor Matt Badiali said it's because of China. China is the largest consumer of Saudi Arabian oil. Lower oil prices are a boon for China, which is building its oil reserves. In essence, Saudi Arabia is taking a temporary hit to scratch China's back.

 As you can see in the following chart, Saudi Arabia has the second largest oil reserves, with more than 250 billion barrels. But the U.S. lags far behind...

 The U.S. is currently producing 9 million bpd of oil. And the International Energy Agency (IEA) expects that to rise by an additional 1 million bpd next year.

 I spoke with Matt on the phone this morning. He said the average shale producer is breaking even at around $77 per barrel. The best shale producers – like EOG Resources and Pioneer Natural Resources in the Eagle Ford – are likely making money with oil at $65... But they're getting squeezed.

Citing data from research firm DrillingInfo, Reuters reported that new well permits dropped 15% last month across 12 major shale formations, despite a double in permits since last November.

 As we noted in last Tuesday's Digest, some companies won't make it through this rout. But added stress on these businesses will lead to a wave of consolidation.

Still, some companies will be winners and others will be losers from the rout in oil prices. While shares of some energy firms are pulling back, others are going belly up.

Just take a look at a list of 52-week lows. Some of the best-run energy firms are hitting new lows alongside some of the worst-run firms. It's a classic case of the baby being thrown out with the bathwater.

 In the November issue of Income Intelligence, Dr. David "Doc" Eifrig recommended one of the safest oil companies in the world. As oil prices headed lower, this stock got hit hard. Today, it sports a massive, safe yield. We doubt you can find a yield this high and this safe anywhere in the market today.

In today's market, with so many stocks hitting new highs, it's rare to see selloffs like the one we're seeing in oil.

We're not saying this is the bottom... We wouldn't be surprised to see oil prices continue to fall. Still, now is a good time to start building positions in well-run blue-chip energy companies paying stable dividends.

 If you would like immediate access to Doc's super-safe oil company paying a huge dividend, you'll have to sign up for Income Intelligence.

It's only $49... a small pittance to pay for what we consider the best income letter on the market. Plus, if you don't like it, we offer a four-month, 100% money-back guarantee. Click here to learn more.

 New 52-week highs (as of 11/28/14): Automatic Data Processing (ADP), Amgen (AMGN), Deutsche X-trackers Harvest China A-Shares (ASHR), ProShares Ultra Nasdaq Biotechnology (BIB), Bristol-Myers Squibb (BMY), Brookfield Property (BPY), Berkshire Hathaway (BRK), Anheuser-Busch InBev (BUD), Chubb (CB), Cisco (CSCO), CVS Health (CVS), WisdomTree Japan Hedged Equity Fund (DXJ), Express Scripts (ESRX), Expeditors International of Washington (EXPD), Fidelity Select Medical Equipment & Systems Fund (FSMEX), Intel (INTC), Coca-Cola (KO), Medtronic (MDT), Altria (MO), Pepsico (PEP), Procter & Gamble (PG), PowerShares Buyback Achievers Fund (PKW), PowerShares QQQ Fund (QQQ), Rent-A-Center (RCII), ProShares Ultra Technology Fund (ROM), ProShares Ultra Health Care Fund (RXL), Constellation Brands (STZ), Sysco (SYY), Target (TGT), Travelers (TRV), ProShares Ultra 20+ Year Treasury Fund (UBT), Wal-Mart (WMT), and W.R. Berkley (WRB).

 In today's mailbag, one reader offers his take on real, hold-in-your-hand gold. Send your missives to feedback@stansberryresearch.com.

 "I will give up my barbarous relics just as soon as the human race stops acting so barbarously – and that includes not just various armies traipsing to or from Moscow, but including actions ranging from Bernie Madoff, to Jon 'Sorry, I misplaced your money' Corzine." – Paid-up subscriber Jim Vanne

Regards,

Sean Goldsmith

December 1, 2014