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MEOG Commentary MEOG
US considers wading into Saudi-Russia supply war
The Trump administration is considering intervening in the supply dispute between Russia and Saudi Arabia, reportedly looking at steps to coerce the pair into cutting production to prop up free-falling oil prices,
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What:
The uS is looking to intervene in the supply war between Russia and Saudi Arabia.
Why:
Low oil prices are good for uS consumers, but have placed significant pressure on the country’s shale oil industry.
What next:
Oil prices could reach as low as $20 in the second quarter.
IN response to the oil price plunged to levels not seen since the early 2000s, Russia and Saudi Arabia have both announced plans to ramp up production next month after their previous- ly-agreed output quotas expire.
Intervention
US President Donald Trump has previously railed against Russia, Saudi Arabia and the rest of the OPEC+ group for making oil too expensive for US consumers. With many shale producers facing bankruptcy if current low prices persist, however, Trump appears to be shifting his posi- tion. “You always get a little torn,” Trump said at a press briefing on March 19.
Saudi Arabia had attempted to get OPEC+ to deepen cuts next month, to support oil prices amid a collapse in demand as a result of the coro- navirus pandemic. Russia refused to back these measures, prompting Saudi Arabia and fellow OPEC+ member the UAE to announce plans to flood the market, causing oil prices to tank. Prices declined further last week, weighed down by the pandemic.
“It hurts a great industry and a very powerful industry,” Trump said referring to the impact on US shale producers. “At the appropriate time, I’ll get involved.”
Washington is contemplating a “diplomatic push” to convince its ally Saudi Arabia to cut its production, the Wall Street Journal (WSJ) reported citing official sources. To prevent Rus- sia from benefitting from this reduction, it will also threaten Moscow with sanctions, according to the newspaper’s sources.
The US has imposed a number of rounds of sanctions against the Russian oil industry since Moscow’s annexation of Crimea in early 2014. These measures include a ban on US companies assisting Russia at offshore Arctic, deepwater and unconventional oil projects and limits on the access of some Russian producers to inter- national financial markets .However, the US has been reluctant to target Russian oil exports, fear- ing that this would plunge markets into chaos and escalate tensions with Russia.
In December, a US senate panel passed the Defending American Security from Krem- lin Aggression (DASKA) bill, first drawn up a year and a half ago. Dubbed “the bill from hell,” it proposes drastic measures to bring Russia’s oil industry to a standstill, including a ban on businesses providing support valued at $5mn or more in a given year to a Russian oil project. This could be interpreted to cover oil purchases, which would jeopardise Russian exports.
DASKA is yet to pass either the US senate or the house, and after that it would need to be signed into law by Trump. In this process it could undergo revision. Further possible sanctions against Russia are in the works, sources told the WSJ. But details on the punitive measures are undisclosed.
Production costs
Saudi Arabia’s oil is much cheaper to produce than Russian and US supplies. Its production costs, including gross taxes, capital spending, extraction and transportation costs, are only $8.98 per barrel, according to Saudi Aramco’s IPO prospectus last year.
“In a nutshell, Saudi Aramco can sustain the verylowpriceandcansustainitforalongtime,” CEO Amin Nasser said in an earnings call on March 16.
While it was Russia’s actions that provoked Saudi Arabia to cut its prices, the kingdom’s main target is higher-cost US shale. US shale oil costs $23.35 per barrel, while non-shale oil costs $20.99, according to the US Energy Information Administration (EIA). Russia, in comparison, extracts oil at a cost of $19.21 per barrel.
On the face of it, this would suggest that Saudi Arabia is best positioned for a potentially pro- longed market downturn. However, it needs an oil price of over $80 per barrel for its state budget to breakeven. Russia, in contrast, can balance the books with oil at only $42 per barrel. The differ- ence is partly due to Saudi Arabia’s greater reli- ance on oil revenues, and partly thanks to efforts by Moscow since the 2014 oil price crash to cut spending and boost tax income.
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w w w . N E W S B A S E . c o m Week 12 25•March•2020