Russia Breaks With OPEC to Go After US Shale, Brutal Price War for Market Share Unleashed

"Russia has had enough of the shale guys living off OPEC plus" and "has been riled by recent US sanctions on Rosneft and Nord Stream 2"

“When Saudi Arabia wanted a rapid response to the coronavirus outbreak last month, King Salman himself made a call to President Vladimir Putin to gain his endorsement — to no avail.”

Just as the coronavirus outbreak wreaks havoc on the oil market, Russia has spotted an opportunity to hurt rivals in the US shale patch. Moscow’s partners in Opec now are collateral damage, and a price-sapping war for market share may follow.

The three-year partnership that joined geopolitical rivals and halted the biggest crude price crash in a generation hit the buffers on Friday when Saudi Arabia-led Opec and Russia failed to agree on deeper production cuts in response to the spread of the coronavirus that has hit the global economy and its demand for oil. 

Russia’s view that rival North American producers would gain most from new efforts to prop up prices killed the deal, said people familiar with the negotiations. Saudi Arabia, unwilling to take on more cuts without Russia as a partner, is readying itself for another stand-off with US shale.

On Saturday the kingdom slashed the official selling prices of its crude to the US, Europe and Asia by as much as $8 a barrel, according to an official list seen by the FT, firing the first shot in what looks likely to be a brutal price war. The Saudi price cuts are among the largest in history.

Brent crude, down about 30 per cent since January, slumped a further 9 per cent to $45 a barrel on Friday after Russian energy minister Alexander Novak said producers would soon be able to pump at will, ending three years of supply cuts designed to support prices.

“Of course, if there is no agreement, Saudi Arabia will produce whatever the customer asks for,” said one Opec delegate. When asked if countries were entering into a fight over market share, he said: “It could be.”

The impact on the oil price from the collapse of the Vienna negotiations could be severe, said analysts, with some predicting a drop to below $30 a barrel.

“This has all the hallmarks of a price war, the only thing missing is the smell of gunpowder,” said Jamie Webster, senior director at BCG’s Center for Energy Impact.

Russia is not a member of Opec but now holds huge sway over oil policy after joining the cartel in making production cuts three years ago.

But Moscow’s refusal to agree deeper cuts was a deal-breaker this week, demolishing a Saudi plan to increase their size and prolong the curbs until the year-end. The kingdom’s plan was conditional on all players taking part: Russia baulked.

It wanted more time to assess the impact of the virus on demand, said officials in Vienna. But Moscow also eyed an opportunity to damage rival US shale producers and the wider American economy, said three people familiar with the discussions in Vienna.

“Russia has had enough of the shale guys living off Opec-plus,” said one person familiar with negotiations, referring to the cartel and allied non-members.

The Kremlin has also been riled by recent US sanctions on the trading arm of Russian energy major Rosneft and Nord Stream 2, the proposed new gas pipeline between Russia and Europe, said two people familiar with the Vienna talks.

A steeper drop in crude prices will cause widespread pain in the American oil industry, said analysts.

“At a time when shale producers face much tighter capital constraints to keep up output, a price war may push US oil companies already at risk of bankruptcy over the edge,” said Jason Bordoff, head of Columbia University’s Center for Global Energy Policy.

The collapse of the negotiations in Vienna underscored the extent to which Russia has taken charge over Opec decision-making despite a new push by Abdulaziz bin Salman, Saudi Arabia’s oil minister, to reassert the kingdom’s authority over the group.

Privately, government officials and oil executives in the kingdom see the benefits — as a low-cost producer — of taking on US shale companies which require higher oil prices to stay profitable. While that indirectly might appease president Donald Trump, who wants to keep gasoline prices in check, Saudi Arabia primarily seeks to protect its own economy.

The sharp price fall after the meeting will trigger memories of the oil crash of 2014 which wrought turmoil across international financial markets, battered the budgets of producer economies and crippled the balance sheets of some energy companies.

Prices collapsed to below $30 a barrel in January 2016, prompting the kingdom to do what was once unthinkable and form a production-cutting alliance with Russia and its Opec peers later that year.

Riyadh and Moscow’s collaboration — backed by the countries’ highest authorities — was more far-reaching. They engaged in talks about corporate tie-ups and cross-border investments. They also became closer on foreign policy despite backing opposing groups in Syria.

It was cemented by the visible personal bond between Mr Novak and his then-counterpart in Saudi Arabia, Khalid al-Falih, who was ousted from his post as energy minister last year in favour of the king’s son.

“They don’t hate each other,” said one Opec official of current relations between Prince Abdulaziz and Mr Novak. “But it’s not the same relationship as with Falih. There was a bromance and chemistry. There’s no chemistry now.”

In January 2018, Mr Falih said the alliance would last for “decades and generations”.

But in recent months, it has seemed as if two of the world’s biggest oil producers were not working from the same playbook.

When Saudi Arabia wanted a rapid response to the coronavirus outbreak last month, King Salman himself made a call to President Vladimir Putin to gain his endorsement — to no avail.

As forecasts for oil demand growth this year weakened, an advisory committee to Opec and Russia initially signalled that additional cuts of 600,000 b/d would be necessary to stem oil price declines. That figure steadily increased to 1.5m b/d this week, reflecting the worsening global coronavirus conditions. This would have taken total cuts to 3.6m b/d.

“The Russians had a very strange view of the market,” said a person familiar with the negotiations. “All through the meeting they said, ‘let’s wait and see, let’s wait and see’ — and said prices had already declined as far as they would decline.”

Then it became clear that Russia had the US in its sights.

As frustration mounted, it was left to the Azerbaijani energy minister to make the final efforts late on Friday to broker some kind of deal between Mr Novak and Prince Abdulaziz. He failed.

Opec officials maintain that the group of producers ultimately has a responsibility to stabilise the oil market. “The point is to not allow commercial stockpiles to build”, said the Opec delegate. “[But] this was not everyone’s opinion,” he said of Russia’s reluctance.

The end of the meeting, said one official who was present, “felt like a wake”.

Source: Financial Times

  1. Melville Pouwels says

    moredescriptive than other articles i’ve read…thanks & go russia

  2. Ray Douglas says

    All we need now is for China to force Saudi Arabia to accept Renmin B for their oil or otherwise keep your f******* oil.

  3. JustPassingThrough says

    Oil opened at 27$/b (RU wellhead price = 20$/b)
    79.05 +9.5%

    There’s a lot at stake here besides the US shale oil travesty.
    (wellhead price >40$/b)
    1. Shale Oil also = Canada + UK
    2. Norway is going to tighten its pro US anti RU belt a bit more. As is the UK.
    3. The Sowdees need 85$/b oil to keep their population quiet. Why do you think that Mbs is arresting his military and assoc. princes including his brother and accusing them of treason?
    4. The US MIC just took a big hit. The Sowdees are/were a cash customer.
    5. With the Sowdees in full rout w/o a shot being fired their idiotic wars will become even more idiotic. ISIS will have to be paid in Shekels.
    6. RU can now be officially blamed for influencing the murikan elections. lmao.
    7. The S&P, DJI and the rest of the world’s casinos are in for a reset. Everything is limit down this am.

    Popcorn time.

    1. David Chu says

      Financial porn! Especially if one reads zerohedge!

      1. JustPassingThrough says

        what are you talking about “financial porn”?
        ypu’ve told the world that you got dumped from ZH.
        time to move on, isn’t it?

        1. David Chu says

          ZH post a lot of sensational and sometimes very poorly written articles to attract eyeballs!

          1. JustPassingThrough says

            it’s definitely clickbait many times.
            the links to other sites and blogs is very good.
            i pi**ed off one of the T.D.’s years ago and got banned.
            the site itself has deteriorated from what it used to be.

            adblocker on and browse.
            now he works for me. 🙂

  4. CHUCKMAN says

    Well, for very troubled economies, this will be a blessing, like a huge tax break.

    So Putin has made his move at a very opportune time.

    And American shale is vulnerable. It’s a capital-intensive industry, and the producers owe the banks lots of money.


    Here is Putin’s opening for a Discovered Check.

  6. cechas vodobenikov says

    Putin’s influence is overestimated in the west—this regards the collectivist nature of Russian culture (the concept of soberest, mir, narodni, etc)—even the anti-Putin russian/amerikan journalist, Masha Gessen recognizes this…Putin’s popularity largely regards the dramatically improved conditions during the past 2 decades in Russia…of course many r upset that he has not been more assertive regarding the Donbass…Strelkov called him a traitor on national TV for refusing to send troops there.

    1. JustPassingThrough says

      Strelkov is hardly an unbiased source. He himself has been accsed of being a traitor.

      Of course an “anti-Putin” would “recognize” this. lol
      “Putin’s popularity largely regards the dramatically improved conditions during the past 2 decades in Russia.” Seems like that is what a leader should be known for.

      What is the purpose of your post?

  7. David Chu says

    Well, oil right now is at $33 per barrel (Light Sweet Crude Oil). What is the break even price for Russia now?

    1. JustPassingThrough says

      RU wellhead price = 20$/b

      1. David Chu says

        “. . . as far as Russia is concerned, when its Finance Ministry said on Monday that the country could weather oil prices of $25 to 30$ per barrel for between six and 10 years.

    2. thomas malthaus says

      In a article on last Friday, I saw a quote of either $42 or $42.40 as sufficient for sovereign budget requirements.

      We’re well below that now.

      1. David Chu says

        Exactly. But the ruble vs. USD also changed too. So, what is the new break-even price for Russia? It’s lower than $42 USD per barrel, but not $33 USD per barrel

        1. thomas malthaus says

          That I don’t know. Ask me again after the systems collapse. The Russian ruble has gone from 61 to 71 in about a week. It was 61 last weekend when I last looked before today.

          Russian may rejigger their budget priorities, which I failed to address in my earlier post.
          This will be a week for the ages.

          1. David Chu says

            If that is the case, ruble 61 last week (corresponding to their $42 USD per barrel break-even point), and right now it’s at 71.5, if my math is correct, the new break-even point should be around $35.80 USD per barrel.

  8. thomas malthaus says

    Perhaps Mr. Putin is viewing with mixed emotions and a sense of relief, the recent actions by Fed Chairman Jerome Powell and Saudi Arabia’s Crown Prince Mohammad Bin Salman.

    Last week’s Fed rate cut has been positive for Russia’s sovereign gold store’s accumulated value.

    The Crown Prince has made it possible–all things being as normal as possible–for global mining production to head into high gear on lower input costs in concert with a rising precious metal price. He deemed it necessary to lower oil prices nearly $7 a barrel and increase output.

    Of course that doesn’t mean he’ll be able to sell it nor will countries be able to store it amidst an oil glut. He must have considered the looming economic crisis amidst the coronavirus sideshow.

    This is not to say Russia has easy decisions to make with respect to domestic oil production and the state budget. Russia’s leadership may decide to emphasize less fossil fuel production and move toward some worker retraining in other industries.

    Some decisions are easier to make with approximately $122 billion in sovereign gold stores, minimal foreign debt, etc.

    The ruble is trading lower against the dollar at about 71:1. The blame is likely due the lower oil prices and perhaps a flight to USD. The latter is likely true, though why investors are doing so in light of market and debt fundamentals is anyone’s guess.

    1. Garry Compton says

      Less Petro dollars for the Kings of Washington – also.

  9. Dale Schneider Jr says

    THINK these suspect to price-gouging, market manipulation, geo-political crap-all in ways for “GOVTS”- to look after own interests, while we people’s of world’s nations ,again remain reliant on our respective leaders “graciousness ,ability” to keep us safe.

  10. TB Wong says

    I love Russia, I love Putin.

  11. Dale Schneider Jr says

    U.S. HERE:WHO determines oil forecast demands for year ?
    SO, according to OPEC+ delegate, “the point is to not allow commercial stockpiles to build.”-WHY?Sounds like same countries get to keep status-quo, same ones lose out on opportunities, and others in between. ?WHY?

  12. cechas vodobenikov says
    goodbye to USA empire

    1. CHUCKMAN says

      Well, it’s good to see the bully take a hit, but I’m afraid your “goodbye” is a little premature.

      In the early 2000s, US oil production had been steadily declining for many years. from about 9m B/D. in the mid-1980s

      It hardly ended the empire.

      It wasn’t until about the 2010s that shale started to turn production back up.

      American conventional production in the early 2000s had reached a small fraction of what total production is today with shale (less than 4m B/D versus about 13m B/D now).

      So, America’s recent experience as a really large producer again is something new, and easy come, easy go.

      1. Ricky Miller says

        Yes, but times are different. American manufacturing did not recover after 2008 and has stagnated, as has wage growth. Shale oil and gas allowed the U.S. to bring high paying jobs into the economy to offset the reality that wages are now declining in purchasing power in a sustained way for the first time in American history. Cheap oil would usually help, and it will a little in propping up consumer demand, but cheaper fuel really won’t help the U.S. like in the past because things are not manufactured here. The loss of large numbers of Shale producers and the jobs along with it will hurt, and the salient point is that American financial managers are just about out of wizardry to make things work. Interest rates have been kept low for a long time to help limit budgetary destruction but this impacted the long term health of the economy by placing in dire straits multiple pension and wealth management plans all across the states. Money has been printed and distributed to banks overnight to keep green blood in the veins and the economy is living off this economic plant food but they’ve done it for years. How much longer can they get away with it before the center gives way? And the budget deficits are washing over the decks now with the whole thing taking on water. All that’s needed now is for the system to slip just a little and go into recession. It’s long overdue and the truth is; who is going to be willing to buy another half a trillion a year in treasury notes, on top of the trillion a year they’re purchasing already, that will be required to stimulate the economy that doesn’t make anything except paperwork back to what passes for health during the next recession? Game over.

  13. Mary E says

    For decades, the US has been in the drivers seat as far as oil prices (as well as controlling some production in SA to keep prices ‘stable’ ie, in their favor), but now Russia has the upper hand and it is showing the US that being evil doesn’t necessarily mean that they will win forever…Win-Win situations are much much better for many reasons, including diplomacy( instead of war to steal the oil of others)..when many win, it doesn’t get much better than that.

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