This Isn’t a “Saudi-Russian” Oil War. It’s a Saudi & Russian War on Shale
MBS couldn't get Russia to join him in aggressive cuts, so he forced it to join him in aggressive pumping — but Russia is not his target
At OPEC+ in Vienna Russia offered to extend the current cuts for another three months and then meet again. Saudi Arabia instead wanted to take another 1.5 million bpd from the market.
When Russia balked the Saudis made a 180-degree turn and declined the extension of existing cuts, slapped a big discount on their oil, and started warming up their spare capacity to start flooding the market come April 1st when the current OPEC+ quotas expire.
The 67-year old Putin wanted to continue the current neither here nor there approach. The 34-year old MBS wanted to try something radical and new. At least ostensibly he wanted more cuts that could lift all producers for which he needed Russia’s cooperation. When he couldn’t get it he instead went the flooding route for which he did not.
The media did MBS a huge favor by failing to notice it was he — the supposed US ally — who blew up the OPEC+ cuts and not Putin. (A typical headline: How Putin spurned the Saudis to start a war on America’s shale oil industry)
The media committed another mistake. It keeps deluding itself this is “Saudi-Russian” war where US energy is merely collateral damage:
- Saudi-Russian price war sends oil and stockmarkets crashing — The Economist
- How a Saudi-Russian Standoff Sent Oil Markets Into a Frenzy — The New York Times
- Putin just sparked an oil price war with Saudi Arabia — and US energy companies may be the victims — CNBC
- The U.S. Oil Industry Was Already Struggling Before Saudi-Russian Price War — NPR
This is silly. Just because MBS started flooding after talks with Russia didn’t go his way the media assumes his pumping is directed against Russia. When in fact every indication is that he wanted Russia as a partner, if not in radical cuts for which he needed its acquiescence, then at least in radical pumping for which he did not.
Whatever Russia’s previous preferred path it now has no choice but to fight for market share which will only increase the pressure on shale further. In other words, despite Moscow’s unwillingness the Saudis have in the end added Russian strength to their own, just for a different strategy.
Sure enough, Saudi Arabia is not in a great state to wage a long campaign, but it may not have to. Shale has never been weaker. The Saudis tried to drive it out before, between 2014 and 2017, and failed. Frackers found ways to slash cost and financial markets propped them up with even more loans.
Neither is likely this time around. Most cost-cutting that was possible has likely already been made, and with the next great recession and a drop in demand around the corner financial markets aren’t standing in line to get into energy that barely makes sense even now
Riyadh needs $85 oil to balance its budget. It can not hope to outlast Russia which can live on $40. But a 6-month flooding campaign to see if it can’t, together with Russia, collapse US shale isn’t the dumbest idea ever.
In fact, precisely the fact MBS needs oil at $85 is what would make him more desperate to try radical means to get there, whether they’re deep cuts or unrestricted production.
Call it the MBS stress test of the US oil bubble in an election year. Truly Trump has great friends…