Crude Oil Tug of Price War Between U.S. Russia and Saudi Arabia

[canadas canadas + 136]

It looks like the tug of price war between the U.S., Russia and Saudi Arabia as the three biggest producers of crude oil worldwide is currently affecting crude oil prices with Putin's Russia using this to try to harm the U.S. unconventional shale crude oil industry since it has higher production costs which makes it vulnerable to being affected by lower crude oil prices which are resulting from a greater current supply than demand due to the corona virus pandemic currently negatively affecting and slowing down the worldwide economy.  

Edited March 17, 2020 by canadas canadas

[James Regan + 1,776]

3 minutes ago, canadas canadas said:

It looks like the tug of war between the U.S., Russia and Saudi Arabia as the three biggest producers of crude oil worldwide is affecting crude oil prices with Putin's Russia using this to try to harm the U.S. unconventional shale crude oil industry since it has a higher production cost which makes it vulnerable to being affected by lower crude oil prices which are resulting from a greater current supply than demand due to the corona virus pandemic currently negatively affecting the economy worldwide.  

 CORRECT!

Edited March 17, 2020 by James Regan
CV is not relevant. We had already too much oil

[canadas canadas + 136]

Saudi Arabia and Saudi Aramco given their connections with the U.S. should unite together to deal with Russia.  Let's not forget that Russia has been supportive of Iran against both Saudi and U.S. interests in the Middle East. Russia is actually trying to kill two birds with one stone.  Both the U.S. and Saudi economies.  Saudi Arabia is the most vulnerable economically of the three because it lacks other resources or options that it can use to counter with.

Edited March 17, 2020 by canadas canadas

[Tomasz + 1,608]

I don't quite understand. Americans are known as great supporters of the free market in  economy.

On the free market, the one with the lowest production costs has a bigger market share.

America, on the oil and gas market, is choosing not free market but rather sanctions on Iran, Venezuela or Nord Stream II to find a market for its quite expensive shale oil and LNG which produces like crazy often below production costs. 

In general, maybe you in America are not aware of this but most of the world's oil and gas producers have been wondering for a long time whether the Americans will not sanction now them in turn because if USA want to increase production at a crazy rate, someone from the market must be eliminated. Russia, Saudi Arabia and other countries certainly think about it

Colleagues, you must decide once for all either the free oil market or the cartel like OPEC. 

 But not a cartel or a free market in dependence, which suits America more completely ignoring the rest of the world and imposing unlawful sanctions arbitrarily on half of the developing market.

You have to end this  exceptionalism, because all countries, not only the US, also have some vital economic and geopolitic interests.and also some ability to defend them, so if America thinks that it has the exclusive right to impose any suitable solutions on the whole world, then because of the fact that the US objectively weakens after 2008 than global conflict will last a long time years until the Chinese finally win it, replacing the US as a world hegemon.

 

In the 90s there was global American dominance. But the world is changing, the Chinese are your powerful challenge The Russians are also more assertive than 20 years ago. The world is simply becoming multipolar.if the world doesn't get along, the Chinese-American rivalry finally means World War III according to the so-called Technological Thucydides’s Trap.

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In the midst of the worst market meltdown in a dozen years which has at its source problems within global dollar-funding markets, Russia found itself in the position to exercise the Power of No.

Multiple overlapping crises are happening worldwide right now and they all interlock into a fabric of chaos. 

Between political instability in Europe, presidential primary shenanigans in the U.S., coronavirus creating mass hysteria and Turkey’s military adventurism in Syria, the eastern Mediterranean and Libya, markets are finally calling the bluff of central bankers who have been propping up asset prices for years.

But, at its core, the current crisis stems from the simple truth that those prices around the world are vastly overvalued.

Western government and central bank policies have used the power of the dollar to push the world to this state.

And that state is, at best, meta-stable.

 

But when this number of shits get this freaking real, well… meeting the fan was inevitable.

And all it took to push a correction into a full-scale panic was the Russians saying, “No.”

The reality has been evident in the commodity markets for months.  Copper and other industrial metals have all been in slumps while equity markets zoomed higher.

But it was oil that was the most confounding of all.

Most of 2019 we saw oil prices behaving oddly as events occurred with regularity to push prices higher but ultimately see them fall.

Since peaking after the killing of Iranian General Qassem Soleimani oil prices have been a one-way trade. Down.

 

Our inept leaders are trying to blame coronavirus as the proximate cause for all of the market’s jitters. 

But that masks the truth. The problems have been there for months, pushed to the back burner by incessant Fed intervention in the dollar-funding markets.

The 2008 financial crisis was never dealt with, just papered over. 

The repo crisis of last September never ended, it’s still there.

And it reappeared with ferocity this week as people sold dollars and bought U.S. treasuries pushing U.S. yields on the long end of the curve to absurd levels.

Credit markets are melting down. Stock markets are the tail, credit markets are the dog. And this dog was run over by a bus.

The Fed intervenes to keep short term interest rates from rising to preserve the fiction it is still in control.

The market wants higher rates for short-term access to dollars.

The Fed tried to help by cutting rates by 0.5% but all that did was tell people the Fed was as scared as they were.  The selling resumed and gold bounced back to it’s recent high near $1690, only to be swatted down on the New York open this morning.

That didn’t work either.

 

OOPS!

And into this mess OPEC tried to save itself by asking for a historic production cut. 

OPEC needs this cut to remain relevant. The cartel is dying. It’s been dying for years, kept on life support by Russia’s willingness to trade favors to achieve other geostrategic goals.

I’ve said before that OPEC production cuts are not bullish for oil just like rate cuts are not inflationary during crisis periods.

But finally Russia said No. And they didn’t equivocate. They told everyone they are prepared for lower oil prices.

The panic was palpable in the reporting on the meeting.

“Regarding cuts in production, given today’s decision, from April 1, no one — neither OPEC countries nor OPEC+ countries — are obliged to lower production,” he told reporters after the meeting.

OPEC’s Secretary General Mohammed Barkindo said the meeting had been adjourned, although consultations would continue.

“At the end of the day, it was the general, painful decision of the joint conference to adjourn the meeting,” he told reporters.

Earlier, Oanda analyst Edward Moya had suggested that a failure to reach an agreement could spell the end of OPEC+.

“No-deal OPEC+ means the three-year experiment is over. OPEC+ is dead. The Saudis are all-in on stabling oil prices and they may need to do something extraordinary,” he said.

There comes a point where negotiating with your adversaries ends, where someone finally says, “Enough.” Russia has been attacked mercilessly by the West for the crime of being Russia.

And I’ve documented nearly every twist and turn of how they have skillfully buttressed their position waiting for the right moment to get maximum return to reverse the tables on their tormentors.

And, to me, this was that perfect moment for them to finally say “No,” to get maximum effect.

When dealing with a more-powerful enemy you have to target where they are most vulnerable to inflict the most damage.

For the West that place is in the financial markets.

Remember, the first basic fact of economics.  Prices are set at the margin. The only price that matters is the last one recorded. 

That price sets the cost for the next unit of that good, in this case a barrel of oil, up for sale.

In a world of cartelized markets the world over, where prices are set by external actors, it is easy to forget that in the real economy (regardless of your political persuasion) the world is an auction and everything is up for bid. 

High bid wins.

So, the most important geostrategic question is, “Who produces the marginal barrel of oil?”

For more than three years now, President Trump has supported his policy of Energy Dominance in a Quixotic quest for the U.S. to become that supplier.  Trillions of dollars have been spent on building up domestic production to their current, unsustainable levels.

This policy pre-dates Trump, certainly, but he has been its most ardent pursuer of it, sanctioning and embargoing everyone he can to keep them off the bid.

What he could never do, however, was push Russia off that bid.

The reason U.S. production rates are unsustainable is because their costs are higher per barrel than the marginal price especially when all other prices are deflating.  Simple, straightforward economics. 

If they were, on balance, profitable then the industry as a whole would not have burned through a few hundred billion in free cash flow over the past decade.

That’s where the Russians’ power comes from.  Russia is one of the lowest cost producers in the world.  Even after paying their taxes to the government their costs are far lower, close to $20 per barrel break-even point, than anyone else in the world when one factors in external costs.

When you don’t owe anyone anything you are free to tell them, “No.”

Sure, the Saudis produce at similar cash costs to the Russians but once you factor in its budgetary needs, the numbers aren’t even close as they need something closer to $85 per barrel.

They can’t tell their people, “No,” you have to do without. Because the populous will revolt.

Russia can ride out, if not thrive, in this low price regime because :

1. the ruble floats to absorb price shocks in dollars.

2. A majority of their oil is now sold in non-dollar currencies – rubles, yuan, euros, etc. – to lessen their exposure to capital outflows

3. the major oil firms have little dollar-denominated debt

4. low extraction costs.

5. its primary governmental budget ebbs and flows with oil prices.

All of this adds up to Russia holding the whip hand over the global market for oil. 

The ability to say, “No.”

And they will have it for years to come as U.S. production implodes.  Because they can and do produce the marginal barrel of oil.  

That is why oil prices plunged as much as 10% into today’s close on the news they would not cut production.

There is a cascade lurking beneath this market. There is a lot of bank and pension fund exposure in the U.S. to what is now soon-to-be non-performing fracking debt. 

Liquidations will begin in earnest later this year. 

But the market is handicapping this now.

I cannot overstate how important and far-reaching this move by Russia is.  If they don’t make a deal here they can break OPEC. If they do make a deal it will come with strings that ensure pressure is lifted in other areas of stress for them.

The knock-on effects of oil plunging from $70 per barrel to $45 over two months will be felt for months, if not years. 

And it is no shock to me that Russia held their water here. If they didn’t, I would have been surprised.

This was Putin’s opportunity to finally strike back at Russia’s tormentors and inflict real pain for their unscrupulous behavior in places like Iran, Iraq, Syria, Ukraine, Yemen, Venezuela and Afghanistan.

He is now in a position to extract maximum concessions from the U.S. and the OPEC nations who are supporting U.S. belligerence against Russia’s allies in China, Iran and Syria.  

We saw the beginnings of this in his dealings with Turkish President Erdogan in Moscow, extracting a ceasefire agreement that was nothing short of a Turkish surrender. 

Erdogan asked to be saved from his own stupidity and Russia said, “No.”

This condition of producing the marginal barrel of oil in a deflationary world places Russia in the driver’s seat to drive U.S. foreign policy behavior in an election year.

Talk about meddling in our elections!

The Achilles’ heel of the U.S. empire is the debt.  The dollar has been its greatest weapon and it is still king.  And it is a weapon with a great deal of power but wielded only against the U.S.’s allies, not Russia. 

Markets will adjust and calm down in a few days. The panic will subside. But it will come back soon enough in a more virulent form. Today is a replay of 2007-08 but this time Russia is far better prepared to fight back.

And when that happens, I suspect it won’t be the Saudis or the Turks that come running to Russia to save them, but the U.S. and Europe.

At which point, I have to wonder if Putin will channel his inner Rorschach.

*  *  *

 

 

Edited March 17, 2020 by Tomasz

[butasha + 123]

The current oil market doesn’t even remotely resemble a free economic market. OPEC which is basically SA and Russia governments are drastically manipulating the price of oil to the extent that US oil is unable to compete. 

If this is the game they want to play then we need to protect our oil industry and any other industry that is not allowed to compete due to government intervention.

Tariff imported products from any country that does not play by accepted principles of the free market. Lower or stop tariffs when government intervention goes away.

[0R0 + 6,251]

3 hours ago, Tomasz said:

That’s where the Russians’ power comes from.  Russia is one of the lowest cost producers in the world.  Even after paying their taxes to the government their costs are far lower, close to $20 per barrel break-even point, than anyone else in the world when one factors in external costs.

 

Those are at currency exchange rates that do not allow for Russians to survive because they end up exporting their food along with the oil and gas to generate the Forex to cover their necessary imports, particularly of consumer goods. 

So, however low they think they are at production costs, it is an illusion. Their labor ends up NEEDING full compensation for the exchange rate induced loss of purchasing power in order to be able to show up for work. Meaning that the change in the oil price in Rubles may not be great as the Ruble drops, but the labor costs catch up to the dollar cost of living. The delay may be substantial at first, but this is the third time round. The delay will be shorter as people demand real wages earlier since they have already gone through this twice in just over a decade.  

Russia's low costs are created by a high dollar and weak Ruble. Does not induce long term competitiveness. 

[0R0 + 6,251]

3 hours ago, butasha said:

The current oil market doesn’t even remotely resemble a free economic market. OPEC which is basically SA and Russia governments are drastically manipulating the price of oil to the extent that US oil is unable to compete. 

If this is the game they want to play then we need to protect our oil industry and any other industry that is not allowed to compete due to government intervention.

Tariff imported products from any country that does not play by accepted principles of the free market. Lower or stop tariffs when government intervention goes away.

In the oil market, the international space is dominated by state operators or state proxy companies. There has not been a free market at all. What we see now IS what a free market looks like, OPEC+ and before that OPEC itself had restricted supplies to maintain higher margins at higher prices. Contrary to common thinking that it is creating an unearned income, the price fixing acts to dampen variations in the rate of investment and thus large scale variability of production.  Let to its own devices, the market will be bifurcated between high price regimens and low price ones as waves of investment come at the high price periods to produce the next glut and there is no investment during low price periods, thus creating a future lack of supply that drives prices higher. The proportion is 5:1. That is why Stanard oil and then TRRC and then OPEC were formed to avoid both conditions.

The high oil prices of the 1970s broke the consumption growth trend and increased the global economy's  efficiency in using oil. Down to reducing population growth, which will eliminate oil demand going forward because of high prices back then. It will be worse  as we have likely peaked in overall global oil consuming demographic last year. 

The price floor of the cartels provided for long term investment and steady production growth to meet demand growth. Mismanagement of finance and industrial policy in China led to a commodity bubble centered on oil, which OPEC exacerbated by constricting supply after a two decade decline in investment that preceded the Chinese demand explosion. This shifted the supply dynamics by making it profitable to produce any oil source including tight oil and tar sands deep ocean projects and arctic drilling. As they came online, they inevitably crashed the oil price and then NG. With advancement of the oil fracking tech. Costs came down and as the application of this technology is short lead time, there is now a price capping mechanism that can kick in within less a year and as rapidly as 6 months in future oil price spikes. 

Russia thinks it can eliminate it financially. Saudi thinks they can intimidate them into cuts via an illegal price fixing arrangement. But the main and correct view from the OPEC+ perspective is that Saudi and Russia must come to terms on restricting output to match demand at a price point at which oil fracking is limited in volume. Russia's idea of financially killing off Shale is stupid. The rig rates and crew rates are correlated to the oil price. What varies is the number of active projects. Legacy financing and lease costs are $10-15/Bbl. Getting the companies into bankruptcy does nothing to prevent the projects from coming online when pricing recovers. To the contrary, it creates a lower threshold price to resuming drilling.  Where the vast volume of shale is breakeven at $50, a wave of bankruptcies results in wipeout of strict lease terms and debt burdens, which lower the breakeven to $35. 

The Russian oil companies who so want to expand production to make use of the reserves burning in their pocket are relying on the Russian public and their workers to make the adjustment to the lower dollar oil price. It won't happen that way. Their expectation that shale would be put out of production is also incorrect. New investment would stop for a while, but they will still be there ready to pounce on a rising price trend, not to speak of a price spike..

 

  

[0R0 + 6,251]

6 hours ago, Tomasz said:

The Achilles’ heel of the U.S. empire is the debt.  The dollar has been its greatest weapon and it is still king.  And it is a weapon with a great deal of power but wielded only against the U.S.’s allies, not Russia. 

 

That is a bit of nonsense. Russia and its companies are dollar debtors. Tight funding conditions in the Eurodollar market puts pressure on Russian external finances as their reduced revenues will quickly bring down their excess reserve positions. Saudi has been successful so far in cutting off about 2 Mob/d of Russian exports to Europe last week. That means 0 revenue from that market. Not $25/bbl, but nothing. 

It is yet to be determined how long Russia's preferred sales arrangement to China would stick with the aggressive Saudi pricing regime. 

The Eurodollar debt markets are funding the Emerging Market economies. They also fund Chinese industry and real estate. Any distress that Russia thinks they have avoided from dollar debt position having been reduced, is still in force by their export customers in food and energy, as whatever Eurodollar debt capacity they did not take onto themselves, has been taken up by their customers, meaning that their demand and the prices they can pay and thus Russia's revenues, still depend on dollar financing conditions and thus so does Russia. 

As we see in the covid 19 crisis, dollar swap lines have resumed, dollar repo markets where Eurodollar markets obtain liquidity in the US have been well funded once the Fed woke up to the problem (took them long enough) so there is no problem for "US Allies". The banks serving the EMs (UK, Swiss, German, French banks) will obtain their liquidity through the usual channels and have their domestic CB's dollar swaps to fall back on.