HOW LOWCAN OIL GO?
scenario as a chance to take aim at U.S. shale producers. Russia clearly believes it can hold out longer in a race to the bottom. In the wake of the oil crash on March 9, Russia’s Finance Ministry said that it had enough resources to cover budget shortfalls at $25 to $30 per barrel of oil for six to 10 years. Meanwhile, the Saudis are in a much more precarious position... For the first time, the world is experiencing a demand shock and a supply shock at the same time. Saudi Arabia relies on oil prices north of $80 per barrel to fund its spending. The last time MbS played this oversupply game... it was a big mistake. In 2016, Saudi deputy economic minister Mohammed Al Tuwaijri warned that without reform measures, the country would be bankrupt in three to four years. Many analysts believe that Saudi Arabia could potentially go bankrupt in only two years with oil prices this low. In a high-stakes game of geopolitical poker, it appears that MbS is getting schooled by Vladimir Putin. Will MbS blink? We doubt he’ll swallow his ego at this point. This is a guy who brutally tortured and murdered a journalist who dared to criticize him. And Putin has left his own trail of dead journalists. The Trump administration has tried to get the sides back to the negotiating table, but for now it doesn’t appear that it’s making much progress. While the Saudis are still considered
biggest producer of crude oil. With OPEC’s power diminished, it sought a new partner to join its organization – Russia. And while Russia has rebuffed the invitation to officially join OPEC, it has entered into several production cut agreements with the group to support higher prices. Most recently, in December 2019, the sides agreed to their deepest cuts ever through the first three months of 2020. Enter the COVID-19 virus... LOW PRICES, LOW DEMAND In early March, as it became clear that the coronavirus pandemic was weakening global oil demand, the Saudis sought more production cuts from Russia. When Russia balked, the Saudis threatened to go to full production – and Russia called its bluff. As a result, on March 9, a barrel of West Texas Intermediate (“WTI”) crude oil fell 25%. It was the biggest one-day drop since the Gulf War in 1991. For the first time, the world is experiencing a demand shock and a supply shock at the same time. Low oil prices are bad for all producers. And both the Saudis and Russians rely heavily on oil to fund their governments. But U.S. shale drillers also pose a threat to both countries. The Trump administration has used U.S. energy independence as a weapon to impose severe sanctions on Russia. Vladimir Putin likely saw this current
50
April 2020
Made with FlippingBook - Online magazine maker