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FSUOGM COMMENTARY FSUOGM
either Russia or Saudi Arabia.
America’s first big shale producer went bust
this month, putting pressure on Trump from the domestic oil and gas industry to do something. Whiting Petroleum, one of the largest compa- nies developing the Bakken formation in North Dakota, filed for protection against creditors, asking them to convert $2.2bn of debt into a 97% stake in the company.
OPEC+’s previously agreed supply quotas expired on April 1, allowing Russia, Saudi Ara- bia and others to pump as much as they please. Backed by the US oil lobby, Trump’s adminis- tration has intervened to try to resolve the dis- pute. Washington will be using diplomacy with Riyadh, which remains one of its strongest allies in the Middle East. With Russia, on the other hand, it is likely to be employing sanctions as leverage. Washington may be promising to scale back existing sanctions in return for Russia changing course, or threatening to impose new measures if Moscow fails to comply, or both.
It is unclear whether such a carrot or stick approach would work. But US shale drillers need oil prices to rise soon or else many will risk going under.
What next?
OPEC+ was understood to have planned to meet on April 6 to discuss their co-operation, but this has been rescheduled to April 9, the Kremlin has said. All members of the groupd are expected to take part in the meeting, which will be held as a video conference, as well as additional producers.
“The sticking point is how much each pro- ducer is willing to cut,” Rystad says. If Moscow and Riyadh fail to break the deadlock, “Saudi Arabia will suffer a [bigger] hit than Russia in all five financial criteria we examine: the impact on oil and gas revenues, fiscal breakeven price, fis- cal deficit and foreign currency reserves, budget deficits and domestic policy,” the consultancy estimates.
Assuming Brent averages $34 per barrel this year and $44 next year, Saudi Arabia’s revenues will halve in 2020 – a loss of $105bn – and will then recover by 30% to almost $135bn in 2021,
according to Rystad. At $20 per barrel oil, Riyadh will lose up to $150bn this year, even when the increase in production is taken into account.
Russia will similarly suffer a 47% slump in 2020 revenues to around $84.5bn, rising 35% to $114bn in 2021, at $34 per barrel oil. At $20 oil, it would see a $110bn shortfall in 2020. Rus- sia would hold up better than Saudi Arabia at this lower price, especially as gas contributes a greater share of its overall revenues.
Despite efforts to streamline its budget, Saudi Arabia’s fiscal breakeven price remains high at $84 per barrel. In contrast, Russia’s breakeven point has fallen from $114 in 2013 to nearly $42 per barrel in 2020, largely owing to a weakened RUB-USD exchange rate.
Other Middle Eastern countries have more to lose from the price war, with Iran already strug- gling with political instability and US sanctions. Its fiscal breakeven point this year is a towering $195 per barrel. Kuwait and the UAE also need higher prices to keep their economies going without extra borrowing.
Saudi Arabia is anticipated to incur a fiscal deficit of 7% this year, whereas Russia has man- aged to balance the books in recent years. Mos- cow also has larger foreign reserves than Saudi Arabia, having amassed around $550bn.
Rystad predicts that Saudi Arabia could face a budget deficit of over $100bn this year, whereas Russia will incur a relatively smaller deficit of $39bn. Russia’s finance ministry has expressed confidence, saying the country can withstand $25-30 per barrel oil for six to ten years.
In addition, Russia benefits from the free floating ruble, which enables authorities to quickly adjust to changing market conditions via devaluations. A weaker ruble also boosts govern- ment revenues from exports.
“Evidently, Russia is the most well-positioned country in this oil-price war, but someone will have to budge, as the global petroleum industry is already taking a hit from COVID-19,” Rystad says. “The longer the volume war goes on, the more long-term implications we will see for all involved.”
All this suggests Russia will have the upper hand in talks on April 9. ™
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