The first victim will be the American shale. The second victim will be the Saudi budget. The third victim will be Russian Economic development and the collateral damage to be suffered by Russia because the US does not take kindly to any form of economic attack.
The last and lasting victim will be Oil.
Russia ostensibly chose not to follow the Saudi/OPEC proposal for significant production cuts to hit the American Hydrocarbons growing exports to the World, with China, which is a prime Russian Hydrocarbons customer, started importing US shale.
Saudi Arabia considered the Russian decision as both an insult and an injury.
Insult because Russia has recently encouraged Saudi Arabia to believe that it can be an Energy partner and a Geopolitical equalizer with Iran,
Injury because if the Saudis accepted without reaction to the Russian decision, then the cut would be at the expense of Saudi Arabia only and to the benefit of both Russia and the US. The other OPEC Countries are not famous for respecting production cut agreements.
The Russian decision started kamikaze tactics.
The damage will be sustained as much by the attacker as by the attacked.
The reasons are as follows:
The contribution of Hydrocarbons extraction to the US GDP is about 1.5% and the total Hydrocarbons business represents about 8% of the US GDP.
Lower gas prices mean cheaper goods in the US, increased consumption, lower inflation
and there will be a lot of Companies that will make a handsome profit out of this as well as the fact that the American motorist voters, that vote by the price of gas, will vote for the President, counterbalancing Oilmen’s negative vote, if any.
Hydrocarbons represent 50% of Saudi Arabia’s GDP and 70% of its exports.
If this situation of Oil around 30$/bbl. continues for the whole of 2020, Saudi Arabia will have a budget deficit of over 15% which will eat away one-quarter of its currency reserves. This at the moment that KSA bets its future on enormous non-Oil investments.
Hydrocarbon revenues generate 30% of Russia’s GDP and 50% of the state budget.
Russia’s GDP grew by 1.3% in 2019, and with the drop in Oil prices for the rest of this year, GDP growth for 2020 will be zero or negative.
ROSNEFT can increase production by 300,000 BPD in two weeks.
Rosneft’s breakeven is around $50/bbl. Urals, so that, losing more than 3 billion per month, by the end of the year, it will have lost half its market cap to this price war.
Russia has nearly $600 billion in reserves, about as much as Saudi Arabia
For now, the Russians are talking tough. That country’s Finance Ministry on Monday issued a statement saying the country can withstand the drop-in oil prices for “six to 10 years” by tapping the Kremlin’s foreign currency reserves. This is very unlikely.
All the above indicates that both Saudi Arabia and Russia have much more to lose than the United States.
Even if the Oil wars cause half of the American shale producers to go bankrupt, because they are greatly indebted already, there will always be enough Capital available in the US for them to start again when the prices pick up. This is the great strength of American Capitalism.
Additionally, shale rigs can restart in weeks while conventional rigs need considerably longer.
Despite the above, the Oil war entered the blitz phase.
Saudi ARAMCO will raise its crude supply, which includes oil to its customers inside the Kingdom and abroad, to 12.3 million BPD in April.
After the recent Gulf trouble, Aramco has kept very important reserves outside the Middle East and can throw them in the market immediately.
Russia stated that it can increase its production by 500,000 BPD to reach 11.8 mil. BPD, a new Russian record.
Simultaneously the IHS Markit, Crude Oil Market Service, estimates that Q1 2020 world oil demand will decline by 3.8 million BPD from a year earlier.
In Q2 2020 the production is likely to increase by over 3 mil BPD when the agreed cuts stop and about 1 mi BPD is added to an already weakened market.
As a result of the resulting price drop, Countries like for example Nigeria will be destabilized and suffer increased civic unrest.
Some other countries like China will prosper on lower Oil prices.
The real victim will be the Oil business Worldwide. Already the investments in Oil are weakening and Oil Companies shares are continuously dropping discouraging investors.
For Q2 2020, Morgan Stanley predicts Brent to trade at $35 per barrel and the WTI price to stand as low as $30 per barrel. The firm’s prior forecast had Brent at $57.50 and WTI at $52.50.
The firm added: “The prognosis for the oil market is even direr than in November 2014, when such a price war last started, as it comes to a head with the significant collapse in oil demand due to the coronavirus”.
Investors are not likely to be attracted to a commodity which is both an environmental problem and crashes every two years.
The re-election of Trump depends more on the Coronavirus epidemic than on the price of Oil.
Russia’s decision and the Saudi reaction will damage much more the Global Oil business, including their own, than the American Economy.