Putin dumps MBS to start a war on America’s shale oil industry
SoDATA — “Interesting times”, says a Pakistani defense analyst. Energy analyst Rashid Hussain Syed says, “if you look at the concept of ‘One World,’ it couldn’t be more evident than in the coronavirus episode. Chinese consumption tanks and so does the economies of the oil producers. Oil consumers may get a respite in terms of lower crude import bills, but with global markets shrinking, their export markets are also shrinking and the global GDP takes a nose dive. So not only the crude consumption is shrinking, so are trade and exports. It is all interconnected. And mind it, the impact is long term”.
According to one report, the world’s faltering effort to contain the coronavirus outbreak hammered stocks and crude oil on Sunday, as new cases surfacing across the U.S. amplified fears of a global downturn.
Brent crude prices collapsed, falling by as much as 31% on Sunday evening in what was the largest single-day drop since the U.S. invaded Iraq in 1991.
Add to the mix: OPEC’s failure last week to strike a deal to cut production prompted Saudi Arabia to lean in aggressively on cheaper oil prices, which fanned concerns about a full-fledged price war that sent oil into free-fall.
On Friday the Kremlin decided that propping up prices as the coronavirus ravaged energy demand would be a gift to the U.S. shale industry. The frackers had added millions of barrels of oil to the global market while Russian companies kept wells idle. Now it was time to squeeze the Americans, reported Bloomberg.
According to Yahoo Finance, investors appeared to price in the likelihood that Saudi Arabia’s fight with Russia over market share will worsen the dramatic spiral lower in prices — “Russia was unwilling to cut oil production further, Bloomberg reported — and it’s taking place against a backdrop of falling demand and plentiful supply.
“After five hours of polite but fruitless negotiation, in which Russia clearly laid out its strategy, the Saudi-Russia oil talks broke down. Oil prices fell more than 10%. It wasn’t just traders who were caught out: Ministers were so shocked, they didn’t know what to say, according to a person in the room. The gathering suddenly had the atmosphere of a wake, said another.”
In the US, most economists estimate that cheaper crude oil translates into lower gasoline prices at gas stations, which act as a de-facto tax cut for consumers.
Yet with the COVID-19 epidemic creating supply shocks and forcing business activity to grind to a halt, analysts don’t see much to cheer about in the current price action, a view upheld by Syed’s overall stance.
“There’s always winners and losers in any market, but right now the idea that lower gasoline prices is going to put more cash in workers’ pockets and give consumer spending and the economy a boost doesn’t seem to cushion the blow for stock market investors,” wrote Chris Rupkey, MUFG’s chief financial economist, in an email on Sunday evening.
“They want out. Big time. The sky is falling,” he said.
How does all these pan out south of the Tropic of Cancer, for example in the Middle East and South Asia?
“Despite nation states, we continue to live in one world, inseparable in more than one ways,” says Syed who regularly contributes to Toronto’s Globe and Mail, The Saudi Gazette, BBC and Dawn.
Analysts are also nervously eyeing U.S. shale producers, which are expected to suffer as cheap oil makes it unprofitable to churn out more supply. Most have financed expansion via debt, fueled by cheap credit.
“U.S. shale production is capital intensive, and debt servicing made for high fixed costs,” noted Marc Chandler, managing director at Bannockburn Global Forex. “Even before the latest shocks, shale producers were struggling.”
For over three years, President Vladimir Putin had kept Russia inside the OPEC+ coalition. The deal also aided America’s shale industry but had never been popular with many in the Russian oil industry.
“The Kremlin has decided to sacrifice OPEC+ to stop U.S. shale producers and punish the U.S. for messing with Nord Stream 2,” said Alexander Dynkin, president of the Institute of World Economy and International Relations in Moscow, a state-run think tank. “Of course, to upset Saudi Arabia could be a risky thing, but this is Russia’s strategy at the moment – flexible geometry of interests.”