Is the End in Sight for the Great Russia-Saudi Oil Price War?

 THE WIRE
06/APR/2020
Crude oil benchmarks Brent and West Texas Intermediate, opened this morning at $33.5 and $27.3 respectively.

Since the fall in prices last month, last week marked a slight recovery in oil prices. This was perhaps a consequence of some hectic intervention efforts by US President Donald Trump, who has spoken with Russian President Vladimir Putin and with Saudi Arabia’s Crown Prince Mohammed bin Salman (aka MBS).

Tweeting in his signature farcical manner, Trump declared that he had brokered a deal between Russia and Kingdom of Saudi Arabia (KSA) to cut output by 10 to 15 million barrels per day (bpd).


The Kremlin denied that President Putin spoke to MBS and the Organization of the Petroleum Exporting Countries (OPEC) meeting called by KSA, which was to be held via video conference today has now been postponed.  

The oil sector is in for some massive variations attributable to the ongoing global refractions. Three months into 2020 and the economy has been hit by a COVID 19 induced recession and a 66% fall in crude oil prices. In January 2020 ,oil was trading at $61-63 per barrel and within weeks fell to $20.9 per barrel. Beyond the coronavirus demand slump this current steep fall in oil prices is a result of a bitter price war between the KSA and Russia. 
The sight recovery in oil prices is a short-term phenomenon. The low demand for oil, will offset any reason for the KSA to back out in its price war with Russia. And it would be credulous to accept that Trump commands that kind of influence over either Russia or MBS to pressure them into a rollback of production. 

OPEC Plus’s deal collapse  
Since 2016, the Russians and Saudis were coordinating their production to keep prices elevated at around $50-$60 per barrel. As long as oil traded at these high figures, US shale oil producers were taking a free ride on OPEC plus’s cuts in production. Then on March 6, 2020 the three-year deal collapsed when Russia refused oil production cuts despite the coronavirus induced reduction in global demand.
The very next day, KSA decided to cut its selling price and increase oil production to above 10 million b/d, with output in April likely to be near 11 million, up from 9.7 million in recent months. As OPEC crude oil production surges to 29.1 million b/d in the next quarter of 2020 the hardest it will be US domestic shale oil manufacturers.

Twilight for American Shale oil 
While a price war isn’t good for either KSA or Russia, it is calamitous for American shale producers. When American companies pioneered ‘Hydraulic fracturing,’ also called fracking it was believed that the US is now more capable of taking its energy future into its own hands. Fracking allowed American extraction companies to recover a staggering amount of oil from deposits that were formerly unworkable. In shale oil extraction the wells go thousands of feet down, and then also run thousands of feet horizontally to reach the target deposit.  After the drilling, millions of gallons of water, proppants and chemicals are pumped down into the well to literally ‘fracture’ the formation and allow the oil to flow back into the pipe to be pumped out. 

US shale oil production has grown from about 0.4 million b/d day in 2007 to a record 12.86 million b/d, the most monthly crude oil production in U.S. history in late 2019. But as a developing fuel source, the production and processing costs for shale oil are very high. Shale oil production remains profitable as long as the price of oil exceeds marginal cost. Most shale oil companies have a break-even point of $40 a barrel, but for some this break-even point rises above $60. Conventional oil production typically costs between $30 to $40 a barrel, but varies a lot.  At $2.8 per barrel Saudi state oil giant Aramco has the lowest production costs in the world. Up until OPEC and Russia were cutting supply to support global energy prices, US shale producers were free riding by boosting production and capturing the market share. 

Notwithstanding the massive production, the fall in oil prices combined with high fracking costs, have meant that American oil companies have struggled to make enough money to satisfy investors. Rampant bankruptcies among American shale production companies raise substantial doubts about the ability of these shale production companies to continue functioning. 

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