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

Media is so eager to see Putin behind everything that it can’t see it is the Saudis who started this, and it’s US oil they’re targeting exactly as they already did once before

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:

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…

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Guy
Guy
11 months ago

So let me get this straight .The biggest proponents of free enterprise capitalism ,the good old US of A ,is bent on fixing the price of oil through OPEC .How do you keep a straight face .

Michael
Michael
11 months ago

“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”

So the biggest loser is US Shale. That should put a monkey wrench into Trump’s MAGA.

cechas vodobenikov
cechas vodobenikov
11 months ago

I wonder how conditions will change in 6 months when the covid 19 hysteria subsides. will the USA continue policies that r self defeating? will trump’s desire for a 2nd term encourage a different approach?

JustPassingThrough
JustPassingThrough
11 months ago

I’ve got a hard time following the logic of this piece.

Mbs takes the risk of a full time revolt of his society.
ARAMCO is in the toilet.
The CIA is on him for arresting their principle asset.
He’s losing in Yemen and Syria.
There is no guarantee that the oil mkt. is going to stabilize.
His GDP is 50% oil based.
He needs 85$/b oil to stay afloat.

Cutting production is what keeps the shale oil people in business.
(That is what Mbs wanted.)
Shale needs hi-priced oil.
They have been profiting from the current cuts as the mkt. shows.
Cutting more would not stop that.

RU and KSA made not be at each others throats but i don’t see that RU dances to Mbs’s tune either

Jesus
Jesus
11 months ago

Russia by saying “no” to the Saudi proposal actually initiated the war against the frackers. Economic warfare is a two way street.
US being highly debt leveraged, fracker demise and default on their loan will ripple through the financial markets as we have seen for the past couple of weeks. Yes it’s attributed corona virus, however, some economic disruptions should not be so chaotic to the economy if it was not leveraged to this level with easy money printed by the Fed.

David Chu
David Chu
11 months ago

No, the Saudis are also the targets of this brilliant Russia checkmate move!

They are shooting themselves in the foot by increasing production to get
the other OPEC+ (Russia mainly) players back to the negotiating table.

Breakeven point for the desert perverts is around $85 USD per barrel,
while Russia can survive $25-$30 USD per barrel for the next 10 years! Regime change on the peninsula coming up very very soon!

https://sputniknews.com/viral/202003121078544005-watch-did-trump-drop-the-f-bomb-just-before-his-speech-at-the-white-house/

Jihadi Colin
11 months ago

I don’t see that this is correct. The Saudi Barbarians need oil at $85 not to “balance their budget” as such but to keep bribing their population to not rebel. The Saudi Barbaria population, not the revolting Riyadhi royal reprobates but the general population, are seething with discontent and would undoubtedly have risen in 2011 but for enormous bribes. Bribes are also necessary to keep the Wahhabis in line (see my post from the other day) and to keep splurging on the genocide (“war”) in Yemen, not to speak of paying tame media to pretend that the Houthis aren’t mopping the floor with the Barbarian army. Even a few months of less than $85 will just drive the Barbarians critically into the red, especially if, or more likely when, the balloon goes up with the death of King Whatsisname and Muhammad bin Salman al Bonesawi’s accused of bumping him off to get the throne. Because that is absolutely going to happen.

cechas vodobenikov
cechas vodobenikov
11 months ago
Reply to  Jihadi Colin

I believe SA will request massive loans from USA….SA and Israel r vital proxies; they both destabilize the ME, which is crucial to US interests

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