Historic Losses For Crude Point to U.S. Shale In Russia's Crosshairs, Say Analysts

Meanwhile, IEA wants Saudis and Russia to abandon playing "Russian Roulette": File Image/PixaBay

In a crash heard around the world, Saudi Arabia launching a price war with Russia caused a near 25 percent slump in oil prices on Monday, the biggest one-day percentage decline for both benchmarks since January 17, 1991, when prices plummeted at the outset of the U.S. Gulf War.

Brent dropped a massive $10.91, or 24.1 percent, to settle at $34.36 per barrel, while West Texas Intermediate fell $10.15, or 24.6 percent, to settle at $31.13 per barrel.

The losses were the result of the Saudis announcing a boost of crude output above 10 million barrels per day (bpd) in April from 9.7 million bpd in recent months, in retaliation for Moscow on Friday refusing to support the Organization of the Petroleum Exporting Countries' (OPEC) bid for deeper oil cuts to address the fall in demand caused by the coronavirus.

Russia in turn said it too could increase output - as well as cope with low oil prices for six to 10 years; and Alexander Novak, energy minister for the former Soviet Union, bragged that "The Russian oil industry has a high-quality resource base and a sufficient margin of financial strength to remain competitive at any forecast price level, as well as maintain its market share."

A host of countries and energy-related organizations warned both countries to abandon what the International Energy Agency called a game of "Russian Roulette"; Bruno Le Maire, finance minister for France, urged the Saudis "to enter into coordination on the oil price question so that it doesn't shake up the markets."

But while media portrayed Monday's calamitous market showing as the result of the Saudis taking on Russia, Johannes Benigni, chairman and founder of JBC Energy Group, said, "They may do that, but Russia always said they want to take on a little bit more of the shale industry, [and] by Saudi Arabia actually now declaring war, they are front-running the Russians in declaring war on U.S. shale."

Chris Midgley, head of global analytics at S&P Global Platts, elaborated, "While low prices will test Saudi fiscal balances, they have the lowest cost barrels and with low debt can pull on sovereign reserves and take the pain.

"Russia may simply allow the Rouble to slide in order to sustain flow or Roubles into their economy while U.S. shale will certainly take the brunt of the pain - their production is unlikely to change quickly with much activity already committed and significant volumes hedged and protected; however, some producers, who have used more sophisticated collars for their hedging strategy, could find themselves in all sorts of difficulty."

Chris Weafer, a senior partner at Macro-Advisory, added that since Russia has a flexible currency and Saudi's riyal is tied to the U.S. dollar, "It means that Moscow is unlikely to blink first, certainly not for another 3 to 6 months, but Moscow may take the view that Saudi Arabia's financial position will be a lot more strained before that.

"The big target for both may be the marginal U.S. shale producers."

Indeed, the IEA warned that if oil prices sink below $25 it will stop new U.S. shale development.