The losers — and even bigger losers — of an oil price war between Saudi Arabia and Russia

KEY POINTS
  • Most energy analysts have dismissed the idea that Saudi Arabia and Russia’s price war has been specifically designed to target U.S. shale, but the industry is expected to bear the brunt of the pain.
  • Some believe the worst hit from a sharp drop in oil prices will be long-time allies of de facto OPEC leader, Saudi Arabia.
  • “Even at $30, something is going to happen … We are not going to stay here. We can’t,” Chris Weafer, a senior partner at Macro-Advisory, told CNBC.
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Russian Energy Minister Alexander Novak and Saudi Energy Minister Abdulaziz Bin Salman sign documents during a ceremony following a meeting of Russian President Vladimir Putin with Saudi Arabia’s King Salman in Riyadh, Saudi Arabia, on October 14, 2019.
ALEXEY NIKOLSKY | SPUTNIK | AFP via Getty Images

An intensifying oil price war between Saudi Arabia and Russia has created “very painful” market conditions for the world’s largest crude producers, analysts have told CNBC, with many braced for sliding revenues over the coming months.

International benchmark Brent crude traded at $34.23 Thursday morning, down over 4.4%, while U.S. West Texas Intermediate (WTI) stood at $31.64, around 4% lower. Oil prices have almost halved since the start of the year.

The downturn for crude futures comes shortly after talks between OPEC kingpin Saudi Arabia and non-OPEC leader Russia broke down.

Markets had been hoping for an agreement between Riyadh and Moscow, as well as other OPEC and non-OPEC producers, in order to deepen oil output cuts and prop up prices.

The group’s unexpected failure to reach a consensus on production policy led oil prices to crash on Monday.

President Donald Trump’s surprise announcement Wednesday to ban travel from continental Europe following the WHO’s declaration that the coronavirus can now be described as a pandemic also acted as a catalyst for further oil price losses Thursday morning.

What does a price war mean for US shale?

Most energy analysts have dismissed the idea that Saudi Arabia and Russia’s price war has been specifically designed to target U.S. shale, but the industry is expected to bear the brunt of the pain.

Securing America’s Future Energy (SAFE), a think tank that advocates for reducing U.S. dependence on oil, believes the American oil industry is the loser from the current price war.

“Saudi Arabia claims to be the swing producer to stabilize the market, but mostly they just cause swings that hurt the free market and the ability to compete,” Robbie Diamond, president and CEO of SAFE, said via email shortly after OPEC and non-OPEC allies failed to reach an agreement.

“Our industry and the U.S. economy has no choice but to watch once again as Saudi Arabia tanks the price of oil to suit its domestic priorities,” he added.

Premium: A Shale-Oil Boomtown As Oil Bust Proves To Be Good
A pumpjack operates above an oil well at night in the Bakken Formation on the outskirts of Williston, North Dakota, U.S., on Thursday, March 8, 2018.
Bloomberg | Bloomberg | Getty Images

Trump initially welcomed the declaration of a price war between Saudi Arabia and Russia, hailing lower oil prices as good news for U.S. consumers.

Saudi Arabia has since signaled its intent to flood the market with crude, unveiling plans Wednesday for state-owned Saudi Aramco to ramp up production to 13 million barrels per day (bpd).

It is thought such a move could prompt a wave of bankruptcies and investment cuts in the U.S. which, in turn, would have a noticeable impact on shale production.

IEA says OPEC allies are in a ‘very, very difficult situation’

Some believe the worst hit from a sharp drop in oil prices will be long-time allies of de facto OPEC leader, Saudi Arabia.

“My main worry today is not on shale,” Fatih Birol, executive director of the International Agency (IEA), told CNBC’s Steve Sedgwick earlier this week.

“It is mainly on some of the major oil-producing countries who have not — despite the calls from the IEA many, many times — diversified their economies.”

Birol suggested countries like Iraq, Algeria and Nigeria — all OPEC producers — were in a “very, very difficult situation” and would require support from the rest of the world.

“They are facing major fiscal strains. Many of them will have difficulties to pay the salaries for the public sector, spending for health, for education, which in turn may provide social pressures in those countries.

Iraq, OPEC’s second-largest producer, is thought to be particularly exposed to an all-out price war because it has one of the least diversified economies of the producer group — despite relatively low production costs.

Iraq’s oil ministry said Tuesday that it will keep in touch with other OPEC and non-OPEC members in an effort to prevent an oil price collapse, Reuters reported.

What about the instigators of the price war?

Shortly after talks broke down with Saudi Arabia late last week, Russia claimed it could withstand lower oil prices for as long as a decade.

Yet, while many believe Moscow is in much stronger financial position to cope with a protracted period of lower oil prices than in previous years, it is not thought to be in the best interests of Russia or Saudi Arabia.

“If you assume that the price difference between agreeing and rejecting last week’s recommendation is $25 (a barrel) then Russia stands to lose a considerable amount of money by not endorsing the proposal,” Tamas Varga, senior analyst at PVM Oil Associates, said in a research note.

“There will come a point when the negative consequences of Russia’s decision will become unbearable for the instigator,” he added.

On Tuesday, Russian Energy Minister Alexander Novak appeared to keep the door open for Moscow and Riyadh to return the negotiating table in order to stabilize markets.

Chris Weafer, a senior partner at Macro-Advisory, told CNBC’s “Squawk Box Europe” on Tuesday that a reaction from the world’s second and third-largest oil producers would be inevitable.

“Even at $30, something is going to happen. The Saudis are going to have to do something because they need a higher price. The U.S. shale industry cannot afford that low price.”

“We are not going to stay here. We can’t,” Weafer said.

Oil falls as virus death toll in China climbs

CNBC

Reuters
KEY POINTS
  • Brent was down 62 cents, or 1%, at $59.19 a barrel by 0623 GMT, having risen 0.5% on Wednesday
  • U.S. crude was down 51 cents, or 1%, at $52.82 a barrel, after dropping 0.3% in the previous session.
Reusable: Crude oil refinery Philadelphia Energy Solutions 141024
Getty Images

Oil prices fell on Thursday, resuming their declines after a brief pause earlier this week, as alarm spread over the economic impact of the Wuhan virus in China, while a bigger-than-expected increase in U.S. crude stocks added to the negative tone.

Brent was down 62 cents, or 1%, at $59.19 a barrel by 0623 GMT, having risen 0.5% on Wednesday. U.S. crude was down 51 cents, or 1%, at $52.82 a barrel, after dropping 0.3% in the previous session.

Prices had steadied in recent days, after a rout pushed them to three-month lows as investors tried to assess damage from the virus to economic growth and demand for crude and its products.

But now the rising death toll from the virus and its dispersion around the world has again turned screens red, with Asian stock markets down sharply.

“The Wuhan virus outbreak and its economic fall-out on Asia, the engine room of the world, remains the most crucial issue facing oil markets, with any rally likely to have short half-lives,” said Jeffrey Halley, senior market analyst at OANDA.

Three Japan citizens evacuated from Wuhan, China, and repatriated on Wednesday have been confirmed to be infected with the coronavirus, including two without symptoms, the health ministry said on Thursday. Two people refused to be tested and Japan has 11 confirmed cases.

A second flight of Japanese evacuees from Wuhan, where the outbreak started at the end of last year, landed in Japan on Thursday, with nine showing symptoms of fever or coughing, broadcaster NHK reported.

Infections in China have passed 7,700 and several countries started isolating citizens evacuated from Wuhan to help efforts to prevent the global spread of the epidemic. In China, the death toll has climbed to 170 people.

The World Health Organisation’s Emergency Committee is set for another meeting later on Thursday to reconsider whether the rapid spread of the virus should now be called a global emergency.

Airlines around the world are suspending or reducing direct flights to China as travel warnings are issued by governments and passenger numbers drop.

Bigger-than-expected gains in U.S. crude oil inventories last week also kept pressure on prices.

Crude stocks rose by more than seven times market expectations, gaining 3.5 million barrels in the week to Jan. 24, the U.S. Energy Information Administration (EIA) said on Wednesday.

Gasoline stocks rose to a record high, increasing for a 12th consecutive week to 261.1 million barrels, the EIA said.

Oil prices skid 2%, extending slide as China virus spreads

CNBC

Reuters
KEY POINTS
  • Brent crude fell by $1.12 a barrel, or 1.9%, to $59.57 by 0113 GMT, having earlier dropped to $58.68, the lowest since late October.
  • U.S. crude slipped by $1.14, or 2.1%, to $53.05, having earlier eased to $52.15, the lowest since early October.
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A general view shows Mexican state oil firm Pemex’s Cadereyta refinery, in Cadereyta, Mexico October 5, 2019.
Daniel Becerril | Reuters

Oil prices slumped a further 2% to multi-month lows on Monday as the rising number of cases of the new China virus and city lockdowns deepened concerns about demand for crude, even as Saudi Arabia’s energy minister sought to calm the market.

Brent crude fell by $1.12 a barrel, or 1.9%, to $59.57 by 0113 GMT, having earlier dropped to $58.68, the lowest since late October. U.S. crude slipped by $1.14, or 2.1%, to $53.05, having earlier eased to $52.15, the lowest since early October.

Saudi Arabia’s Energy Minister Prince Abdulaziz bin Salman Al-Saud said on Monday he was watching developments closely in China and said he felt confident that the new virus would be contained.

Markets are being “primarily driven by psychological factors and extremely negative expectations adopted by some market participants despite its very limited impact on global oil demand,” he said.

With the coronavirus’s ability to spread getting stronger most financial markets are being hit, although many are closed in Asia due to the Lunar New Year holidays.

Oil gains after US-China trade deal and a rise in crude inventories

CNBC

Reuters
KEY POINTS
  • Oil prices rose on Thursday after the signing of an initial trade deal that sets the stage for a surge in Chinese purchases of American energy products, while U.S. crude inventories fell more than expected.
  • Brent was 45 cents, or 0.7%, higher at $64.45 a barrel by 0310 GMT.
  • U.S. crude was up by 39 cents, or 0.7%, at $58.20 a barrel.
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A drilling crew secures a stand of drill pipe into the mouse hole on a drilling rig near Midland, Texas February 12, 2019.
Nick Oxford | Reuters

Oil prices rose on Thursday after the signing of an initial Sino-U.S. trade deal that sets the stage for a surge in Chinese purchases of American energy products, while U.S. crude inventories fell more than expected.

Brent was 45 cents, or 0.7%, higher at $64.45 a barrel by 0310 GMT, while U.S. crude was up by 39 cents, or 0.7%, at $58.20 a barrel.

Under the so-called Phase 1 deal to call a truce in a trade war between the world’s two biggest economies, China committed to buying over $50 billion more of U.S. oil, liquefied natural gas and other energy products over two years.

“It was a formal signing of something which had already been agreed, but that has certainly boosted sentiment,” said Virendra Chauhan, oil analyst at Energy Aspects.

Trade sources and analysts said China could struggle to meet the target and gains in oil are likely to be limited ahead of more detail on how the commitments will be achieved.

Official U.S. data showing a much bigger than expected drop in crude oil inventories, also helped underpin prices, Chauhan said.

“They were slightly constructive. We saw a counter-seasonal draw in U.S.crude stocks and that generally is supportive,” he said.

Oil inventories fell by 2.5 million barrels, compared with analyst expectations of a drop of 500,000 barrels, according to data from the Energy Information Administration (EIA), an agency of the U.S. Department of Energy.

Nonetheless, gasoline stocks rose by 6.7 million barrels and distillate stocks were up by 8.2 million barrels, according to the EIA.

U.S. crude production also rose to a record 13 million barrels per day, the agency said.

Oil prices are returning to range trading, analysts said, as the threat of conflict between Iran and the U.S. receded further after they traded missile and drone attacks earlier this month.

That sent Brent to highs above $71 a barrel, before prices touched more than one-month lows in advance of the signing of the U.S.-China deal.

Oil drops on concerns that US-China trade deal may not stoke demand

CNBC

Reuters
KEY POINTS
  • Oil prices slipped on Wednesday on concerns that the pending Phase 1 trade deal between the United States and China, the world’s biggest oil users, may not boost demand.
  • Brent crude was down 19 cents, or 0.3%, at $64.30 per barrel by 0428 GMT.
  • U.S. West Texas Intermediate crude futures were down 19 cents, or 0.3%, at $58.04 a barrel.
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A policeman is seen at West Qurna-1 oil field, which is operated by ExxonMobil, in Basra, Iraq January 9, 2020.
Essam al-Sudani | Reuters

Oil prices slipped on Wednesday on concerns that the pending Phase 1 trade deal between the United States and China, the world’s biggest oil users, may not boost demand as the U.S. intends to keep tariffs on Chinese goods until a second phase.

U.S. Treasury Secretary Steven Mnuchin said late on Tuesday that tariffs on Chinese goods will remain in place until the completion of a second phase of a U.S.-China trade agreement, even as both sides are expected to sign an interim deal later on Wednesday.

Brent crude was down 19 cents, or 0.3%, at $64.30 per barrel by 0428 GMT. U.S. West Texas Intermediate crude futures were down 19 cents, or 0.3%, at $58.04 a barrel.

“A pickup with global demand for crude may struggle as U.S.-Chinese tensions linger after some hardline stances from the Trump administration,” said Edward Moya, analyst at brokerage OANDA.

“Financial markets are disappointed that the Trump administration … signalled tariffs will remain in place until after the 2020 U.S. Presidential election, depending on whether China comes through on their promises with the phase-one agreement.”

U.S. President Donald Trump is slated to sign the Phase 1 agreement with Chinese Vice Premier Liu He at the White House on Wednesday. That agreement is expected to include provisions for China to buy up to $50 billion more in U.S. energy supplies.

Adding to worries over U.S.-China trade relations, the U.S. government is nearing publication of a rule that would vastly expand its powers to block shipments of foreign-made goods to Chinese technology giant Huawei, according to two sources.

Meanwhile, U.S. crude inventories rose by 1.1 million barrels, data from the American Petroleum Institute showed, countering expectations for a draw.

U.S. oil production is expected to rise to a record of 13.30 million barrels per day in 2020, mainly driven by higher output in the Permian region of Texas and New Mexico, the U.S. Energy Information Administration (EIA) said.