What a day thus far!

[Spitfire]

KSA and Russia have picked an awfully interesting time to have a price war over oil.

Equities markets are experiencing a bloodbath. Fed futures rates are showing ZERO % by summer, that's right: ZERO %.

Of course, the thing is central banks can do NOTHING here. No thing.

And yet, I'm making money today, +18% right now. What a great time to be alive!

 

[Spitfire]

Go outside and take a beat. It's a even greater day to be alive!

Greetings:

Was planning on taking the great nephews up to old town Alexandria and rent some electric scooters and let them terrorize some pedestrians on the mount Vernon Trail. I think these things are actually meant for mobility from point A to point B. But I took one recently from Roslyn to National Airport on a bad Metro Day last fall and it was a blast, it went about 18 mph.

But not going to happen today. Windows are all open, I'm good.

 

[AnthonyJames]

Greetings:

Was planning on taking the great nephews up to old town Alexandria and rent some electric scooters and let them terrorize some pedestrians on the mount Vernon Trail. I think these things are actually meant for mobility from point A to point B. But I took one recently from Roslyn to National Airport on a bad Metro Day last fall and it was a blast, it went about 18 mph.

But not going to happen today. Windows are all open, I'm good.

Make sure they lick the handle bars!

 

[Yooper]

KSA and Russia have picked an awfully interesting time to have a price war over oil.

Absolutely.

As I'm sure you know, the "oil war" ain't just between the Middle East and the West. I admit to not seeing this coming, but it's not something I generally focus on.

While doing "Russian things" I worked with a fellow officer years ago who was all about "The Prize" (i.e., Daniel Yergin's take on this subject). If we were still working together today he would have no doubt mentioned this at OOB and said what is happening was completely predictable.

Thanks for the post. Got me reading more about the dynamics in play. No doubt Iran and Syria are factors for both sides....

Cheers.

--- End of line (MCP)

 

[Spitfire]

Absolutely.

As I'm sure you know, the "oil war" ain't just between the Middle East and the West. I admit to not seeing this coming, but it's not something I generally focus on.

While doing "Russian things" I worked with a fellow officer years ago who was all about "The Prize" (i.e., Daniel Yergin's take on this subject). If we were still working together today he would have no doubt mentioned this at OOB and said what is happening was completely predictable.

Thanks for the post. Got me reading more about the dynamics in play. No doubt Iran and Syria are factors for both sides....

Cheers.

--- End of line (MCP)

Greetings:

It’s complex indeed. I figured at least in the short term the goal is to suppress shale prices because we (the US) needs prices at a certain level to be profitable.

Remove that, and our “besties” take away POTUS ability to declare us net exporters. Not to mention suppressed prices genuinely hurts us economically, ergo here we are.

Inverted yield curve.

Fed Funds rate already priced into the market at zero.

Then when SHTF for real, we are out of monetary tools to respond at all.

 

[AnthonyJames]

Then when SHTF for real, we are out of monetary tools to respond at all.

Best keep your head away from the fan then.

 

[Gilligan]

Obama backs away

 

[Yooper]

So the current angle being pushed is that Russia has decided to "attack" the U.S. by going low with oil. If so, whether this is part of its Election 2020 interference, it makes no sense. There is no way Russia comes out of this in good shape regardless of how much this hurts the U.S.

So what am I missing here? The traditional take is that Russia needs $60 per barrel to break even and I have seen nothing to show that its extraction/refining/etc. processes are any better than they were when the $60 value was initially bandied about. It can't be that Russia will use other areas to cover oil losses because frankly Russia doesn't have much to offer. Or do they? Could it be it built up a sizable cash reserve from exporting gas to Europe? I'm finding that tough to believe because a) we are coming out of winter so demand will decrease, but more importantly it was a very mild winter (so demand wasn't that high to begin with).

So U.S. frackers get hurt. But that's kinda small potatoes, right? And with ongoing innovation that allows frackers to lower their costs....

What are the additional angles? Because, at first blush, this doesn't seem like a smart play for Russia.

Speaking of smart plays, this might be better for KSA in the short-term, but it's a gambit that may just blow up in the Saudis faces long-term. Meaning, the only thing I like about the Saudis (since forever) is that we "need" them as part of the U.S.' foreign policy balancing act. But we don't "need" them that much. Or do we?

In the end, the U.S. still remains the best positioned to come out of this COVID-19 episode or any economic war than either of the other two. So there has to be another game afoot.

Thoughts?

--- End of line (MCP)

 

[Scat]

So the current angle being pushed is that Russia has decided to "attack" the U.S. by going low with oil. If so, whether this is part of its Election 2020 interference, it makes no sense. There is no way Russia comes out of this in good shape regardless of how much this hurts the U.S.

So what am I missing here? The traditional take is that Russia needs $60 per barrel to break even and I have seen nothing to show that its extraction/refining/etc. processes are any better than they were when the $60 value was initially bandied about. It can't be that Russia will use other areas to cover oil losses because frankly Russia doesn't have much to offer. Or do they? Could it be it built up a sizable cash reserve from exporting gas to Europe? I'm finding that tough to believe because a) we are coming out of winter so demand will decrease, but more importantly it was a very mild winter (so demand wasn't that high to begin with).

So U.S. frackers get hurt. But that's kinda small potatoes, right? And with ongoing innovation that allows frackers to lower their costs....

What are the additional angles? Because, at first blush, this doesn't seem like a smart play for Russia.

Speaking of smart plays, this might be better for KSA in the short-term, but it's a gambit that may just blow up in the Saudis faces long-term. Meaning, the only thing I like about the Saudis (since forever) is that we "need" them as part of the U.S.' foreign policy balancing act. But we don't "need" them that much. Or do we?

In the end, the U.S. still remains the best positioned to come out of this COVID-19 episode or any economic war than either of the other two. So there has to be another game afoot.

Thoughts?

--- End of line (MCP)

US cos. may be leveraged too deep into fracking oil /natural gas. If prices continue to fall and they end up missing payments....Could be a buying spree.
Never been a huge fan of Saudi, actually prefer Israel.

 

[GURPS]

So the current angle being pushed is that Russia has decided to "attack" the U.S. by going low with oil.

I thought they were attacking Saudi Arabia ?

 

[Yooper]

I thought they were attacking Saudi Arabia ?

Yeah, that's what I'm finding hard to believe; that this is a "price war" between KSA and Russia. Why would Russia choose to fight KSA? On the surface, KSA seems to be far more capable of sticking out a "price war" than Russia.

So I must be missing something. As it's not really my area of knowledge or interest I admit I'm not looking too deeply. But still....

--- End of line (MCP)

 

[TPD]

hmmmm....

 

[Monello]

Obama backs away

F*ck obama

 

[Monello]

Yeah, that's what I'm finding hard to believe; that this is a "price war" between KSA and Russia. Why would Russia choose to fight KSA? On the surface, KSA seems to be far more capable of sticking out a "price war" than Russia.

So I must be missing something. As it's not really my area of knowledge or interest I admit I'm not looking too deeply. But still....

--- End of line (MCP)

F*ck KSA & Russia.

 

[Spitfire]

Yeah, that's what I'm finding hard to believe; that this is a "price war" between KSA and Russia. Why would Russia choose to fight KSA? On the surface, KSA seems to be far more capable of sticking out a "price war" than Russia.

So I must be missing something. As it's not really my area of knowledge or interest I admit I'm not looking too deeply. But still....

--- End of line (MCP)

Greetings:

I don't think it's as much as Russia "choosing" to fight KSA as much as being forced into it.

The genesis of the latest brouhaha is the result of the breakdown in three way talks between KSA, Russia, and OPEC with respect to the cutting of production in response to covid-19. Russia as I'm sure you're aware isn't an OPEC member, but has been allied with KSA and by extension OPEC (loosely called OPEC+) for four or five years now to keep production at a level which will prop up prices. The agreement helps Russia project power in the ME and to a lesser extent globally (their MO for the past several years). You're right in previous comments that Russia needs oil at a certain price level to be profitable, so obviously they weren't interested in OPEC cuts. Furthermore, in order to have this "membership" in the first place, they were already agreeing to a ~2m bpd cut. I think that agreement expires soon anyway, so unless they can sort this out, Russia can easily grab the "excess" production capacity that the market will bear.

This also happened in 2014, but ultimately the costs were too much to bear. KSA doesn't have much intent of sticking it out, they're more interested in causing price shocks. They've raised output above their refining capacity, which means they are tapping into their storage. I don't know what storage numbers look like, but obviously not sustainable in perpetuity.

As for the U.S. shale industry? Well, that's either an unintended side-effect or the real target here. Either scenario is plausible. As stated in previous post, U.S. shale companies had been finding it difficult to raise capital through equity investment and so had to turn to debt financing instead. And now that's drying up. If oil prices are below that magical number required to be profitable, "poof". They be gone. So there are a few dynamics in play here. One dynamic I'm not sure about .. how does KSA's game plan change in light of the Saudi Aramco IPO?

Also worth noting, this is more than just covid-19 curtailing demand. Global demand for oil will be shrinking in 2020, which compounds the current problem.

 

[Scat]

One dynamic I'm not sure about .. how does KSA's game plan change in light of the Saudi Aramco IPO?

Not sure they have one. What else do they have to offer but oil? Of course, they have used that money to buy things like Fondomonte California and Fondomonte Arizona.

 

[Yooper]

Greetings:

I don't think it's as much as Russia "choosing" to fight KSA as much as being forced into it.

The genesis of the latest brouhaha is the result of the breakdown in three way talks between KSA, Russia, and OPEC with respect to the cutting of production in response to covid-19. Russia as I'm sure you're aware isn't an OPEC member, but has been allied with KSA and by extension OPEC (loosely called OPEC+) for four or five years now to keep production at a level which will prop up prices. The agreement helps Russia project power in the ME and to a lesser extent globally (their MO for the past several years). You're right in previous comments that Russia needs oil at a certain price level to be profitable, so obviously they weren't interested in OPEC cuts. Furthermore, in order to have this "membership" in the first place, they were already agreeing to a ~2m bpd cut. I think that agreement expires soon anyway, so unless they can sort this out, Russia can easily grab the "excess" production capacity that the market will bear.

This also happened in 2014, but ultimately the costs were too much to bear. KSA doesn't have much intent of sticking it out, they're more interested in causing price shocks. They've raised output above their refining capacity, which means they are tapping into their storage. I don't know what storage numbers look like, but obviously not sustainable in perpetuity.

As for the U.S. shale industry? Well, that's either an unintended side-effect or the real target here. Either scenario is plausible. As stated in previous post, U.S. shale companies had been finding it difficult to raise capital through equity investment and so had to turn to debt financing instead. And now that's drying up. If oil prices are below that magical number required to be profitable, "poof". They be gone. So there are a few dynamics in play here. One dynamic I'm not sure about .. how does KSA's game plan change in light of the Saudi Aramco IPO?

Also worth noting, this is more than just covid-19 curtailing demand. Global demand for oil will be shrinking in 2020, which compounds the current problem.

Absolutely excellent post. Thank you very much for posting.

I continue to come away from this thinking both Russia and KSA are engaging in some very risky high-wire behavior. Perhaps not in this oil war; rather, how this might backfire on any number of high-priority "portfolio" items (e.g., off the top of my head, Iran, Syria, Yemen, Turkey, etc.). Some of these items are directly head-to-head, most are indirect/via proxy, but they are all high priority.

Again, thanks for the post.

Cheers.

--- End of line (MCP)