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 rises for 2nd day amid hopes for output cut by US producers

CNBC

Reuters
KEY POINTS
  • Brent crude futures rose $1.44, or 3.9%, to $38.66 a barrel by 0226 GMT, while U.S. West Texas Intermediate (WTI) crude gained $1.12, or 3.3%, to $35.48 a barrel, following a jump of over 8% the previous day.
GP: Oil field 200227 Asia
A derek pumps in an oil field in Kuwait near the Saudi Arabian border.
Joe Raedle | Getty Images

Oil prices climbed for a second day on Wednesday, lifted by hopes that U.S. producers will cut output, but gains were limited compared with Monday’s crash after Saudi Arabia and Russia triggered a price war.

Brent crude futures rose $1.44, or 3.9%, to $38.66 a barrel by 0226 GMT, while U.S. West Texas Intermediate (WTI) crude gained $1.12, or 3.3%, to $35.48 a barrel, following a jump of over 8% the previous day.

“Expectations that U.S. shale oil producers will need to trim output helped improve the market sentiment,” said Satoru Yoshida, a commodity analyst with Rakuten Securities.

Occidental Petroleum on Tuesday joined a growing list of hard-pressed North American oil producers slashing spending and drilling after crude prices slumped to their lowest levels in more than three years.

Oil and equity markets had staged solid rebounds on Tuesday after the previous day’s pummeling, supported by signs of co-ordinated action by the world’s biggest economies to cushion the economic impact of the coronavirus epidemic.

But growing skepticism about Washington’s stimulus package to fight the coronavirus outbreak knocked the steam out of an earlier rally in Asian shares on Wednesday.

“The rebound in crude oil is not expected to last long, with Saudi and Russia boasting about how much they can boost output by as the battle for market share begins,” ANZ said in a note.

Saudi Arabia said on Tuesday it would boost its oil supplies to a record high in April, raising the stakes in a standoff with Russia and effectively rebuffing a suggestion from Moscow for new talks on production levels.

The clash of the two oil titans sparked a 25% slump in crude prices on Monday.

Russian oil minister Alexander Novak said on Tuesday he did not rule out joint measures with OPEC to stabilize the market, adding that the next OPEC+ meeting was planned for May-June. But Saudi Arabia’s energy minister told Reuters he did not see a need for the meeting if there was no agreement on measures to deal with the impact of the coronavirus on oil demand and prices.

“If the slumping oil prices force U.S. shale oil producers to cut production by June, there is chance that OPEC+ would go back to an agreement to reduce output,” Rakuten’s Yoshida said.

On the downside, U.S. crude oil inventories rose in the most recent week, while gasoline and distillate stocks dropped, data from industry group the American Petroleum Institute showed on Tuesday.

Oil slips amid demand concern, fears over OPEC+ deal for deeper output cuts

CNBC

Reuters
KEY POINTS
  • Brent crude fell 48 cents, or 0.96%, to $49.51 per barrel by 0337 GMT.
  • U.S. West Texas Intermediate (WTI) was down 38 cents, or 0.83%, at $45.52 per barrel.
GP: Oil production as sun sets
Oil production in Azerbaijan
Vostok

Oil slid nearly 1% on Friday as worries about global oil demand and economic growth slowdown caused by the coronavirus outbreak were heightened by concern over non-OPEC crude producers not yet having agreed to cut output further to support prices.

Brent crude fell 48 cents, or 0.96%, to $49.51 per barrel by 0337 GMT, while U.S. West Texas Intermediate (WTI) was down 38 cents, or 0.83%, at $45.52 per barrel.

The Organization of the Petroleum Exporting Countries (OPEC) on Thursday pushed for crude output by OPEC and associated producers — a group known as OPEC+ — to be cut by an extra 1.5 million barrels per day (bpd) in total until the end of 2020. The call came ahead of an OPEC+ meeting scheduled for Friday in Vienna.

Non-OPEC states were expected to contribute 500,000 bpd to the overall extra cut, OPEC ministers said. But Russia and Kazakhstan, both members of OPEC+, said they had not yet agreed to the deeper cut, raising the risk of a collapse in cooperation that has propped up crude prices since 2016.

Some analysts expected Moscow to ultimately endorse the agreement.

“If it says no, the entire union could collapse — and with it any new bilateral trade and investment deals in the pipeline as well as the strategic influence Moscow has secured by participating in the production agreement,” RBC Capital Markets said in a research note.

“There will be a flurry of high level calls between Moscow, Riyadh and Abu Dhabi to get the deal done.”

Even with the deep cut, Goldman Sachs said the OPEC+ deal will not be able to prevent a global oil market surplus in the second quarter, or sequentially lower prices in the coming weeks. The bank maintained its Brent price forecast at $45 a barrel in April.

“Ultimately a rebound in demand, not supply cuts, will be the necessary catalyst for a sustainable rebound in prices,” the bank said.

Meanwhile ANZ said global oil consumption could fall by 1.6 million bpd in the first half of 2020 and contract by around 300,000 bpd for the full year.

“Growth may return in H2 (second half of 2020), but is unlikely to be enough to offset the losses,” the bank said.

Oil rises more than 1% ahead of OPEC meeting to discuss supply cuts

CNBC

Reuters
KEY POINTS
  • Brent crude rose by 67 cents, or 1.3%, to $51.80 per barrel by 0436 GMT.
  • U.S. West Texas Intermediate (WTI) was up by 55 cents, or 1.2%, at $47.33 per barrel.
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An offshore oil platform.
Cavan Images | Cavan | Getty Images

Oil prices rose more than 1% on Thursday ahead of an OPEC meeting in which Saudi Arabia is expected to push the group and its allies including Russia to agree to further output cuts to support the market.

Prices were also supported by a lower-than-expected rise in crude oil inventories in the United States, alleviating some concerns of oversupply in the world’s biggest oil consumer.

Brent crude rose by 67 cents, or 1.3%, to $51.80 per barrel by 0436 GMT, while U.S. West Texas Intermediate (WTI) was up by 55 cents, or 1.2%, at $47.33 per barrel.

“Crude oil prices were boosted by a broad positive sentiment overnight, and a much lower-than-expected … crude oil inventory data,” said Margaret Yang, a market analyst at CMC Markets.

″(The) market is also anticipating a decent output cut to be carried out by OPEC+, as Covid-19 has brought a significant impact to world’s energy demand. More production curb is needed to shore up crude prices.”

U.S. crude stocks rose modestly last week, less than what analysts had expected, while U.S. oil exports surged to more than 4 million barrels per day (bpd) for the first time since December, suggesting a rise in overseas demand.

Ministers of the Organization of the Petroleum Exporting Countries (OPEC) hold their formal meeting later on Thursday, followed by a meeting of the broader OPEC+ group including Russia on Friday.

Saudi Arabia and other OPEC members are seeking to win support from Russia to join them in additional oil output cuts to prop up prices that have tumbled by a fifth this year because of the global spread of the coronavirus outbreak.

Russia has instead proposed keeping the existing cuts by the group until the end of the second quarter, sources said.

Saudi Arabia wants extra cuts of 1 million to 1.5 million bpd for the second quarter, and to keep existing cuts of 2.1 million bpd in place until the end of 2020.

“If OPEC+ settles with something in the middle of the Russian request of no change in cuts and the 1.5 million Saudi goal, that might not be enough to keep prices supported here,” said Edward Moya, senior market analyst at broker OANDA.

“OPEC+ needs to send a strong message and anything below 1 million barrels in deeper production cuts will send oil prices sharply lower.”

Geopolitical tensions in the Middle East also boosted prices. The Saudi-led coalition fighting in Yemen said it had foiled an attack on an oil tanker off Yemen’s coast on the Arabian Sea, the Saudi state news agency SPA reported on Wednesday.

Concerns over demand growth remained, however, with the International Monetary Fund chief saying the global spread of the virus has crushed hopes for stronger economic gains this year.