Can Russia Use Saudi Price War To Strike A Fatal Blow To U.S. Shale?
Henry Foy and Derek Brower posted a March 9, 2020 article to the Financial Times (FT) with the title above. They write that “Igor Sechin, the most powerful man in Russia’s oil industry, and one of Vladimir Putin’s closest confidants, was the architect of Moscow’s decision to withdraw last week from a pact with Saudi Arabia to limit crude production, sparking an oil war that sent prices crashing 30 percent last Monday,” oil’s biggest one day loss since the Gulf War. Light sweet crude closed just under $33 at $32,93 on Friday.
“Armed with a $570B foreign reserves war chest, a floating exchange rate, and an economy that relies far less on foreign capital and imports than just a few years ago, Russia believes it can weather the sharpest fall in crude oil prices since 1991 for longer than rival producers such as Saudi Arabia and — most importantly — the U.S. shale industry.”
“With significant financial reserves available, the Russian government is probably right toi think it can sustain [weather] a low price environment for some time,” said James Henderson, a Director at the Oxford Institute for Energy Studies. “It won’t be easy, but three years would be achievable,” he added.
And, the U.S shale industry has benefited from the OPEC production cut, as U.S. oil production “has soared by 4.5M barrels per day [up to 13M per day pre-coronavirus], eating into Russia and Saudi Arabia’s global market share,” the FT noted. “By February of this year, the U.S. slice of world oil production had lept by 4 percentage points; while, the combined share held by Russia and Saudi Arabia had declined by 3 percentage points.”
“Reversing that shift was the Kremlin’s main objective when it decided to reject Saudi Arabia’s request last week to prolong and deepen the production cut to support prices,” FT wrote. “Saudi Arabia’s response has driven prices down further than even Moscow predicted; but, in contrast to previous oil market crashes, Russia appears prepared for a crisis,” a long wait.
“Since 2015, since the last big oil crash and a swath of Western sanctions were imposec for Russia’s annexation of the Crimea in Ukraine — which tipped Russia into a recession — Moscow has resgtructured its economy to make it more stable and resilient.,” the FT noted. “Hydrocarbons still accounted for 40 percent of Russia’s budget income in 2019, and diversification efforts have underwelmed. But, Moscow’s decision to promote stability over growth in the last six years, largely at the expense of the population’s incomes, means Russia is better placed to survive the current shock,” the publication added.
“Russia’s budget break-even price for oil has fallen to $42 per barrel — down from $100 per barrel a decade ago, and has run budget surpluses for the past two years,” the FT noted. “Most importantly, in 2017, Moscow began diverting excess oil revenues into a national wealth fund, while prices remained above the break-even point, thanks in large part to the Saudi pact.”
“The deal itself was…the rigjt decision,” Russia’s Energy Minister said Alexander Novak said last Tuesday. “It has allowed us to earn extra rubles, about $137B…and form [build] necessary reserves, including by filling the National Wealth Fund.” “Today that holds more than $150B,” the FT added.
“Using those reserves, Russia could navigate oil prices between $25 and $30 a barrel for six to ten years Russia’s Finance Ministry saidlast Monday,estimating that average prices of $27 per barrel would require$20B of budget support per year from the fund.”
“Russia’s strong balance sheet means that low oil prices shouldn’t result in major strains in the economy –certainly nothing like those that occured in 2015-2016,” said William Jackson, Chief Emerging Markets Economist at Capital Economics. “We suspect that oil prices would probably have to drop to $25 per barrel before Russia changed tack.”
If these extended time lines come to pass, the U.S. shale industry could suffer a portential fatal blow; or at least be shuttered for years. Russia wants to bury the U.S. shale industry; and, perhaps Saudi Arabia as well. Russia seems postured for the long-haul; but, one wonders how long Riyadh can hold out. Many of the elite and crown princes bought stock when Saudi Aramco IPO-d earlier this year — and they have collectively lost a ‘ton’ of money as the stock is now well below its IPO price. So, there is likely a lot of angst and anxiety among the Saudi elite who went big on Saudi Aramco — which in turn, could put pressure on Mohammed bin Salman. In the meantime, +$20 oil is not likely far away. If the coronavirus wreaks havoc for another couple of weeks in the U.S., and the global economy sinks lower into a global recession, we might even see oil below $20 per barrel, according to some prominent oil analysts. Stay tuned. RCP, fortunascorner.com