In order to get an objective evaluation of what exactly is happening on the world oil market, what caused a drastic decrease in the prices and what prospects could be expected, it is not only necessary to look at all the events involved in their chronological order but to do so with quite a touch of cynicism. It is obvious that the depreciation of the Russian ruble against the USD and the Euro will have negative consequences for Russia’s standards of living one way or another. However, the analysis of this situation requires a separate and careful consideration. Therefore, in our current case we must ignore this issue and focus strictly on the world oil market.
This is indeed pure cynicism and it is rightfully so: first we must go over the “business” and only then can we deal with the more “personal” aspects because no matter what, the events that are to be expected to occur in Russia depend mostly on what is going to happen in the world of big businesses. Whether we like it or not, the current level of Russia’s economic development isn’t substantial enough for the country to be completely independent of this larger-scale spiral. Although it doesn’t depend on hydrocarbon as much as it used to, 40% of Russia’s budget is made up of taxes and duties of oil and gas companies that supply hydrocarbon to the foreign market.
How many reasons are there for the oil crisis?
There is not one but two main reasons for the collapse of the world oil price as we mustn’t forget about the epidemic of coronavirus COVID-19 in China. This gradually grew into a pandemic and is now spreading mainly in Europe whilst China has practically solved the issue by now. We shall return to the problematic of COVID-19 a bit later and focus now on what everyone has been hearing lately. The reasons behind the oil collapse can be summarized in a few word: in order to face the falling prices that resulted of the coronavirus, Saudi Arabia had offered all member countries of OPEC and OPEC+ to sharply decrease their oil production. Russia disagreed with this proposition (which turned out to be an ultimatum) and everyone got in an argument.
Grown up men got mad at one another and now the whole world suffers from it. It’s a wonderful story, however it doesn’t explain in any way the collapse of commodities exchange and stock prices of oil producing companies (stock prices of all kinds of companies went down, even in the high-tech branch). All this happened simultaneously. Somewhere there are oil wells and tankers plowing the ocean, and somewhere (where?) there are shares of Apple. It’s quite hard to understand and therefore it is necessary to take a step back and recall how it all began.
Five years ago
Summer 2014. The price of Brent crude oil has set a historical record with a barrel price reaching 111.87 USD. By January 2016, the exact same barrel has dropped to $30.8. Surprisingly, most of us have already forgotten the dramatic events that took place only 4 years ago when prices fell by several times. This however is a characteristic of our human psyche which responds more actively to newer events and casts the past into the vast depths of our memory.
That period of time was quite a difficult one for the Russian economy. In parallel to what was going on on the world oil market, it also had to face sanctions from the United States and the European Union. Even the most optimistic of optimists could not deny the decline in Russia’s living standards, but only the most pessimistic of pessimists could say that we’re all about to meet our end. In fact, we survived, though we are shaken. We survived for three reasons: there were reserves in the RNWF (Russian National Wealth Fund), the budget was decided based on the price of a barrel (first at 60, then 50 and finally 40 USD), and we managed to compensate for the loss in foreign exchange earnings from oil exports with a sharp increase in food and armament exports.
In addition, Gazprom provided assistance. Gazprom was able to efficiently take advantage of the fact that all fluctuations on the world oil market causes changes in the gas market with a six-month lag. Nevertheless, the situation was quite delicate and Russia had no interest in having the price of a barrel at its lowest.
There was another country whose economy was severely impacted by the drop in the price of oil. Objectively, Saudi Arabia was hit even harder than Russia. 80% of the kingdom’s state budget is made of taxes and other revenues coming from the state company Saudi Aramco which has full control over the extraction, refinement and export of oil and oil products. The kingdom’s state budget was decided based on the cost of a barrel at $80. In order to cover the deficit, foreign exchange reserves were used (which in 2014 were amounted to approximatively $1 trillion). Currently, gold and foreign currency reserves have decreased by 50%, hence to $500 billion. The sum is huge, but the events of 2014-2015 clearly showed that it is by no means endless and it is therefore not surprising that Saudi Arabia tried to achieve an increase in oil prices.
Whereas in the 70s, OPEC’s leader was able to solve this kind of issue quick and easy by reducing the quantities of production and export, in the 2010s, Saudi Arabia no longer had such a helping tool. 40 years ago, OPEC controlled about 75% of the world’s oil production. By 2015, however, the situation had changed drastically: the total world oil production being of 96.4 million barrels a day, OPEC accounted only for 32.0 million barrels a day, or in other words, 33.2%. Which isn’t bad at all, but not enough to have full individual control over the prices. If you can’t do it yourself, ask a friend—if you don’t have one, at least find a temporary like-minded person. This is exactly how the idea of OPEC+ has emerged—the aim was to pull up to OPEC other oil producing countries that were not part of the cartel. This is also what caused the unexpected warming of the relationship between the KSA (Kingdom of Saudi Arabia) and Russia which is something no one had ever witnessed before.
Russia alone however wasn’t enough to get a conditional “controlling stake in world oil production”: the country only accounts for about 12.5% of the world production. This is precisely why the negotiations about the creation of OPEC+ took so long. The time was worth it though as more nation states joined OPEC+: Azerbaijan, Kazakhstan, Malaysia, Mexico, Oman, Bahrain, Sudan and South Sudan, Brunei and Equatorial Guinea, Russia and 12 other countries that were part of OPEC. The pool turned out to be a powerful one, as the shared desire to increase the price of oil allowed to proceed.
On November 30, 2016, the OPEC+ agreement was signed by the ministers of energy, or ministers of mineral resources (these positions having different names in different countries, though the core remains the same). The agreement was a simple and decisive one: the parties involved agreed to collectively reduce the daily oil production by 1.8 million barrels. As of 2016, when daily production was of 96.7 million barrels, this was a decrease of almost 2%. According to the authors of the agreement, this should have been enough for the demand to grow by this exact number in relation to supply. In theory, this should have been enough for the price of a barrel to increase by 15-20%. The only thing left to do was to wait and see whether or not stock quotes would confirm this forecast.
For some of the nation states that had signed the OPEC+ agreement it was easier to fulfill it within the quota that was decided. For others, it was more difficult. For instance, in Azerbaijan, the state-owned company SOCAR has a complete monopoly over the production of both gas and oil. In Russia, however, there is a dozen of companies to be listed: Rosneft, Lukoil, Gazpromneft, Surgutneftgas, and so on. But at the end, everyone managed to cope with the quota because they realized the deed was worth the candle as further events showed. At the moment of the signature, the price of a barrel was $47.97. By January 2017, it had reached $55.98, which means it had increased by 17% in one month. It is important to notice that the USA weren’t and to this day still aren’t a part of OPEC+ even though the country managed to come out on world’s top in oil production, outrunning both Russia and Saudi Arabia. The thing is, the United States are also the world’s largest oil consumer, and lately their production has been mainly for themselves. Naturally, this does have an impact on the world market: every year the USA are buying less and less oil and the falling quantities do reflect on the prices. However, in November 2016, OPEC+ did not have any formal reason to invite them to the general negotiations.
OPEC+ as a way to accumulate reserves
Since 2017, OPEC+ ministerial meetings have been held on several occasions: there was a revision of the terms and conditions yet no real reason for there to be any dispute. Everyone was pleased with the situation, including Russia. The country began to replenish the RNWF again: since 2014, the Central Bank of Russia has been buying 60% of their production from the gold mining companies and funds from the USA smoothly turned into physical gold whose reserves significantly grew. In summary, the OPEC+ agreement allowed Russia to restore the RNWF, survive through western sanctions, and continue working on changing the structure of its economy. In comparison with the year 2014, the country’s dependence on oil decreased by 5% and import substitution developed. OPEC+ helped the Medvedev administration and the Central Bank to reduce inflation and demonstrate the level of qualification they had achieved: the state budget turned out to be in surplus several times, which means that the government was able to make all the investments it had planned on doing in different sector’s of the country’s economy and bring its projects to completion. In the May 2018 decrees, Vladimir Putin suggested national development projects for which the Medvedev government was able to provide implementation plans that didn’t end up working out in 2019. The result is that now the country has a new government. However, this isn’t the main point. What is, is the fact that national projects generally had a chance to come into being: the comfortable world oil prices made it possible to accumulate the necessary fonds.
Saudi Arabia, on the other hand, wasn’t so pleased with the resulting situation. A lot of thought had to be put into working out the state’s budget based on the price of 75-80 dollars per barrel. The foreign-exchange reserves continued to decline and Saudi Aramco (which had to reduce its investments in geological prospecting in order to increase the transfers made to the budget) wasn’t very pleased either. After a long preparation, Saudi Aramco made the only move there was to be made in this situation: it became a corporation and put up a block of shares on its local stock market Tadawul. The first public offering took place on December 5, 2019, and it did so with quite a stir: during the bidding, the price exceeded the initially proposed one by 10%. 1.5% of the company’s shares were put up for sale at an initial price of $8.5 and were immediately bought at $9.4. A simple calculation shows that the market capitalization of Saudi Aramco increased from the initially announced 1.7 trillion dollars to 1.88 trillion dollars. With this Saudi Aramco has set a world record, leaving Apple and Microsoft far behind.
Having sold 1.5% of its shares, the kingdom’s oil company received $25.6 at its disposal. In a word, it was a triumph, a fanfare and a party: the only thing is, because of all the celebration, the fact that buyers of the shares were exclusively members of the royal family and a few other wealthy families of Saudi Arabia (as well as funds from Kuwait and the UAE) was not mentioned. There are two sides to the coin: on one hand, the shares were bought by “those who needed to buy them”. On the other, there is a question to be asked: did the above-mentioned gentlemen spend their money of their own free will? Judging by what happened to a Saudi journalist in the KSA embassy in Turkey, one could understand that “free will” is quite a relative concept in the kingdom. But at the end of the day, one way or another, Saudi Arabia did enter the exchange trading. The company’s leadership announced that there was an additional option: In 15% of the shares that could be put up for auction someday, just not yet but when there will be an opportunity.
Features of shale hydrocarbon production
The oil sector has also been developing in the country that didn’t join OPEC+. Since the signature of the agreement of the oil states, the volume of shale production in the USA began its rapid growth. Fracking (also known as hydraulic fracturing) fundamentally differs from traditional oil production in the amount of oil and the speed at which it is extracted from the well (fracking being the less advantageous one). As soon as the second year of the well’s exploitation, these parameters decrease by half, and so they do by another half over the course of the third year. In order to maintain their initial pace and volume of oil extraction, shale companies have no choice but to behave like gas addicts, that is to continuously drill new wells and increase their volumes of production, which is a work that requires to be carried out even more intensely.
The basic rate of the FRS is low because shale companies have been confidently acquiring loans while putting up both stocks and bonds in stock trading. By doing so, they are obviously hedging their risks. This however is a requirement in order to obtain a loan in the USA.
Hedging, if taken literally, has quite an obvious meaning: a hedge is a limit. Risk hedging is a protective mechanism that aims to limit losses that could be caused by possible negative scenarios that occur in the financial markets. Companies cannot control financial risks on their own since such risks depend on global volatility in the prices of raw materials, interest rates, geopolitical situations and so on. Hedging is relatively inexpensive and this is why companies acquire such a peculiar “lifebelt” in case any external shock was to affect them. We could use shares of American Airlines as an example: the value of these shares depends on the world oil prices. The more expensive the oil, the cheaper the shares of the company. An investor who holds American Airlines shares in his portfolio consequently acquires long-term positions in the oil market as an insurance by purchasing contracts with a six-month expiration. If the oil price is growing, the aviation shares fall, but there still is a profit made on oil and thus, everything turns out nicely. The tools for hedging are the so-called options which are exactly what American shales are acquiring.
There a different ways to fight the market element. For instance, plenty of us managed to live in a country that simply eliminated the phenomenon as such. In times of capitalism, in order to increase the stability of development, companies use hedging, a market-based insurance mechanism against the very market-like nature of economy. We shall not talk about this casuistry anymore, but we will end this topic with a conclusion: not only do American shale companies have loans, they are also hedged, and therefore are insured against bankruptcy for a while in case there is a collapse in barrel prices.
Nevertheless, the entire shale sector is reminiscent of the gold rush times. Loans, bonds, hedging, stocks, all my eye and Betty Martin. It definitely is not easy to figure something out of all this nonsense and this is probably the reason why the American law provides companies with the option of voluntary bankruptcy which frees the company’s owners from all responsibilities. Roughly speaking, this is what it looks like: a company declares itself bankrupt and is being put up for auction where it can be bought at a very minimal price by its new owner who won’t need to pay off his predecessors’ debts.
We have gone over all these subjects for one sole purpose: we must remember that the bankruptcy of US shale companies doesn’t necessarily mean that the production of oil by hydraulic fracturing will end once and for all. There will be a buyer to be found and God knows what his behavior will be like. If he considers it profitable, he might immediately resume production, or maybe he will wait for the world market situation to turn in his favor. Moreover, from a technical point of view, shale production does in fact encourage such behavior: oil wells are just as easy to remove as they are to preserve. One of the shale mining trends in the USA is for small companies to go bankrupt and their shares to be bought at a cheap price by major companies such as Chevron or ExxonMobil. This is exactly what they often try, as one could say, to “rub in” as proof of the immortality of shale mining. They say all the vermin loses out and huge predators come in (the ones who are able to function without loans and bonds). It is true, although the reason why huge companies become huge is because the don’t take pointless risks: majors certainly will not engage in shale production until the price of a barrel on the world market is at least 20-25% higher than the costs of production. Such margin is indeed necessary since there are also transportation costs to be taken into account, and profit is needed not only for its own sake but also in order to switch to an oil addict regime, that is, the possibility of drilling new wells without any further money seeking.
«Shake, but do not mix!»
Shale companies in the States felt at ease with the price of a barrel being ensured to remain within a stable range of $55 to $70 thanks to the OPEC+ agreement. This situation allowed them not only to maintain but even to increase their production. While Saudi Arabia, Russia and other members of the agreement were solving their problems by “accumulating fat” in their financial reserves, the States took the first place in the world in terms of production volume, occasionally assuming the part of an exporter. With the abundance of extracted oil, the USA continue to buy it, being both an importer and an exporter. Such are the chemical properties of oil. There isn’t a single refinery on the planet that would accept working with only one single sort of oil. Shale oil is light and low in sulfur, which of course is good. The problem is that the refinement of such oil in its pure form does not give refineries the opportunity to produce diesel, fuel oil and asphalt. Without such production, any country gets uncomfortable. It is for this very non-market reason solely related to the physical and chemical properties of this energy resource we call “oil” that American refineries import brands of heavy crude oil.
Northern US states have been traditionally importing Canada’s heavy bitumen oil. This is why the economies of these two north-American countries are closely intertwined. Both Canada and the USA are in need of oil products, so Canada gladly buy’s light oil from the USA whilst the USA imports heavy Canadian oil. A similar situation happens in the Gulf of Mexico where 12 large American refineries are located while purchasing heavy Venezuelan bitumen oil. Even though oil is bituminous in both Venezuela and Canada, it is extracted from sandstones which makes them two completely different sorts of oil in terms of their chemical composition and are thus not interchangeable. Venezuelan oil cannot be used in a mixture with oil from refineries located in the north of the USA just like Canadian oil cannot be mixed in the south. This is a very important nuance since American oil refining is in need of both Canadian and Venezuelan oil in order to function normally.
Bolivarian Venezuela today and tomorrow
Both Chavez and Maduro did not want their oil to be controlled by their neighbor in the north. This is exactly why the United States are furious with the existence of the Bolivarian regime in Venezuela. However, these two gentlemen do have bees in their bonnet: they were not able to accumulate enough money to build their own refineries in Venezuela. Historical odds made it so: these refineries are simply not there. Venezuela has always been supplying oil to the United States and buying oil products from them. This quite an abnormal situation but as everyone knows, every country has the right to blurt out its own mistakes and thus we shall not go into Maduro’s problems too deeply. What a bright feeling it must have been for the US when Russian oil companies massively implemented on Venezuelan territory? One could easily imagine that, though describing it would require the use of highly inappropriate vocabulary. We didn’t evoke Venezuela in vain: its oil has a direct connection to what happened on the world market during the year 2019 which became the forerunner of the downfall of the OPEC+ agreement. We shall recall that in 2019 the United States came up with a certain Guaido and imposed sanctions against Venezuela, not for the sake of conducting colorful revolutions but with the absolutely totalitarian goal of controlling the oil sector in this country. It didn’t work out, though: Maduro turned out to be wiser than the late Gaddafi. This is the reality today: there is military cooperation with Russia, the country is independent, yet there is no trial. Venezuela has got everything together so far and obviously, it is not according to Guaido Sombrero’s ways.
Everyone has probably already heard that the United States’ sanctions against Venezuela aim to profit the US themselves, but it is worth reminding it just in case. Refineries located on the border of the Gulf of Mexico ended up without Venezuelan oil and it required an urgent substitution. There is oil with a similar chemical composition being produced in Iran but even there Mr. Trump has shied away with sanctions. With such an abundance of choice, this is indeed where the choice ended. There is only one sort of oil left and this is the sort that did, in fact, save the southern oil refineries last year: Urals oil. In 2019, Russia’s oil supply to the United States has doubled in money and tripled in physical volume. It is hard to disagree with the US democratic party who was the first to understand who exactly chose to put “our russian Trump” on their head, right? Jokes aside, the US’ goal to finally destabilize the situation in Venezuela do not have so much to do with politics: we mustn’t forget that Venezuela was proved to be the world’s number one in terms of oil reserves. American companies have been operating in Venezuelan fields for a while now: they have acquired enough experience and developed the right technologies to extract oil from bitumen reservoirs. Here the costs of oil production are considerably lower than the ones of hydraulic fractioning which means that if the United States do manage to establish full control over all oil fields in Venezuela, they will become a leader in the global oil market which neither OPEC nor Russia will be able to compete with.
Venezuela is more important to the United States than Iraq and Syria. Due to its geographical proximity, the US are able to organize a much sterner form of military supervision. Because of the fact that oil industry in Venezuela is nationalized and belongs to the state-owned company PDVSA is a blessing for the USA, since it spares them a bunch of organizational problems as they only need control over a single company. Our blogosphere has often made heard the voices of numerous critics about the actions of Rosneft (which has actively invested billions of dollars in oil projects). There are also plenty of accusations against Igor Sechin. Before agreeing with such kind of criticism, it is worth thinking about oil and about how Russia’s position on the world market will evolve in the case of a drastic increase in the volume of shale oil production being backed up by traditional oil production in Venezuelan fields. Light shale oil together with heavy Venezuelan oil is the kind of proposal that would appeal to the refineries of any country and Russia will be able to give a similar response only in the case if the large-scale industrial production of Arctic Light oil (offshore oil from Russia’s artic seas) begins. However, the costs of Arctic Light production, together with the level of technology reached by our oil companies still doesn’t stand a chance against a potential offer made by the United States. Therefore, one must question how coincidental it is for strategic bombers of Russia’s aerospace force to appear from time to time on the airfields of Venezuela.
China, or the world’s leader in oil imports
Usually, this is where the analysis surrounding the sanctions that were put out against Venezuela would come to an end. However, we will not do so here because we won’t forget the fact that China has been the largest oil importer on the planet for the past several years. It is a sin to talk about the world oil market without mentioning the Chinese market, and it is a deadly sin not to do so at the times this article is being written. Not only is China “the world’s workshop”, it is also a country that has put a lot of effort in raising the standards of living of its population. These have grown significantly and in our modern times, it also implies the growth of the country’s motorization. China has a dense population and there is not enough oil in the country for everyone, and thus the import of black gold is leaping very fast. Rosneft and other oil companies caught up the trend just in time, confidently seizing the opportunity of diversifying their export: Europe is one thing, but we can also be well fed in China.
It is fashionable nowadays to talk about the “Power of Siberia”. Actually, an event of quite such stature has taken place in 2018 when the second phase of the East Siberia — Pacific Ocean (ESPO) trunk pipeline was put into operation. This has instantly swept off Saudi Arabia of the first place as China’s leading oil supplier as no tanker could ever be cheaper than pipeline delivery. Russia’s oil supplies to China have doubled in 2018 and Saudis could only wave their handkerchiefs to Russia while obviously experiencing the brightest and kindest of feelings towards us. This is all business. Nothing personal. Yet it’s a shame, isn’t it? Here’s another nuance: Russian oil in China is mostly acquired by independent refineries rather than state-owned companies. This (and not interstate relations) is precisely what caused ESPO to work, increasing its power, and prevented railway delivery to far Eastern ports from stopping: not only are Russian companies transporting oil in this direction and not only to China, but also trying to cover the entire Southeast Asian region.
In 2019, Russian oil supplies to China grew by an additional 9% and reaching 77.6 million tons. However, by the end of the year, Saudi Arabia turned out to be the top provider with 83.3 million tons (which is 50% more than the previous year). Was it a magic trick? It doesn’t seem so. China used to be the main oil buyer for both Venezuela and Iran, both countries falling under US sanctions in 2019. Naturally, due to the US-China economic war, American oil supplies to China also stopped in 2019. Was it so bad for the States, though? By “subtracting” Iran, Venezuela and the US themselves, China was not able to acquire even 20 million tons of oil. Saudi Arabia, through Saudi Aramco, managed to fill this market niche. For some reason, the OPEC+ agreement does not recall these events when analyzing the market crash, even though we are talking about the largest sector of the world oil market, that is, its largest importer.
12/05/2019: new terms of the OPEC+ agreement
In December 2018, OPEC+ ministers worked out and signed the new terms of their agreement: for 2019, the total production volume was reduced by 1.2 million barrels per day. Despite the best efforts of OPEC+, the world production in 2018 did not decrease, it grew instead (though not significantly) to 97.8 million barrels a day, which means that OPEC+ conditions “removed” only 1.2% of the world market’s total. Nevertheless, over the course of 2019, the price of a barrel remained in a comfortable range of 55-70USD, the range being comfortable not only for OPEC+ members but also for shale companies in the United States.
In January 2020, the information department under the US department of Energy announced the results for 2019: oil production in the country increased by 933 thousands barrels per day. It turned out that not only did OPEC+ ensure a comfortable price, but also obligingly freed a market niche that got entirely “eaten” by USA shale companies. The States definitely entered the world oil market with their export volume reaching 2.2 million barrels daily. It is true that the main supplied destinations were not very diverse, mainly Canada and Mexico since supplies to China had fallen to almost zero, although the world market has become global enough for the whole world to become one huge “communicating vessel”. The States entered the supply market, occupied a certain segment of it and thereby untied the hands of Saudi Arabia whose efforts were focused on increasing supplies to China. The US did not abandon their attempts to gain full control over the Venezuelan oil sector: this isn’t even about Guaido anymore but about sanctions against Rosneft subsidiaries that worked with Venezuelan oil. We must also recall how the year 2020 started: it started with a terrorist attack operated by the United States against the head of the IRGC of Iran, General Qasem Soleimani. The purpose of the murder is obviously to cause unrest in the Islamic Republic and thus attempt to provoke a change of power in Iran. However, the plan seemed to be a little too optimistic.
Of course, Russian leaders knew very well about both the continuous growth of shale production in the United States and the actions undertook by Saudi Aramco in the Chinese market. Nevertheless, on December 5, 2019, the Russian minister of Energy laid his signature upon the amendment to the terms of the OPEC+ agreement which implied a decrease in total production by 1.7 million barrels per day (that is still about +500 million barrels a day in comparison to 2019). The effectiveness for this new agreement was determined to last until the end of the first quarter of 2020. One more time. OPEC+ reduced production over the course of 2019 by 1.2 million barrels per day whilst the production growth in the USA has been of 900 thousand barrels per day. The US did not manage to achieve the other 300 thousand barrels so OPEC+ generously threw an extra ration of 500 thousand barrels for them to eat. The world level of oil production reached 98.7 million barrels per day in 2019 and the new terms of the OPEC+ agreement removed 1.7% of this volume from the market. Previous experiences have shown that this should have been enough to maintain the price of a barrel within the range of 55-70 USD.
Who would have thought Denmark would have anything to do with this?
Why did Russia consent to this agreement? It has nothing to do with any kind of conspiracy theory, but the chronology of the events is factual. Where there is oil, there is gas, a hell of hydrocarbons. The construction of Nord Stream 2 over the course of 2019 has been fighting one specific problem: the Danish Ministry of Foreign Affairs. Russia’s relations with the Energy Agency of this country (which has traditionally always been responsible for everything happening in the energy sector) have always been and still are very constructive, as this structure does not involve itself in politics. Energy is the only thing it’s interested in. A special decision made by the Danish Parliament decreed all issues related to NS 2 were to be transferred to the Ministry of Foreign Affairs, and thus created a huge mess out of the blue. However, in summer 2019 the NS 2 case was given back to the Energy Agency and it promptly issued all the necessary approvals for the new gas pipeline route. The Swiss Allseas pipelayers went to work on full capacity, trying to make up for all the time that had been lost. However, the United States still had the opportunity to launch a strike of sanctions. Therefore, the signature Alexander Novak placed under the new terms of the OPEC+ agreement on December 5, 2019 pretty much looks like there was some bribery involved.
But it turns out the bribe wasn’t taken. On December 21, 2019, Mr. Trump signed the Pentagon budget for 2020 and incorporated into it a bunch of new sanctions against the NS 2 after which the Swiss pipelayers immediately scatted. The attack on the Iranian general happened later on, followed by the resurrection of a corpse by the name of Guaido and finally sanctions against Rosneft subsidiaries related to the Venezuelan oil trade. It doesn’t make a lot of sense for these events to be considered separately, the analysis can be complete only if one is able to see the whole chain of US operations on a full scale. This is also an argument in the face of those who believe the United States have “come to terms” with the loss of their status as the planet’s only superpower. Actually, it is far from being so and the country is still capable of conducting attacks on several fronts at once as provided by the new edition of the US National Security Strategy which was approved by their president in December 2017 (this event having already been covered by our e-journal Geoenergetics.ru in February 2018).
We must recall that in this document, the United States designated China, Russia, Iran and the DPRK as their strategic adversaries and distinctly determined that the main and most promising industry in Russia is energy. There were tough sanctions against the NS 2 and an increase in supplies of LNG (liquified natural gas) produced in the USA to the European gas market in 2019. The ousting of supplies coming from Iran and Venezuela from the Chinese oil market considerably reduced China’s import origins. The “peaceful agreement” that has been signed with China states that Beijing shall annually purchase $50 billion worth of energy resources from the US, which shortens China’s list of importers even more. Given the successful maneuver operated by Saudi Arabia on the Chinese oil market in 2019, it may result that supplies to the world’s largest importer will end up under the control of the United States and the KSA which will turn out to be a huge punch in the strategic interests of both China and Russia. If the States were able to simultaneously gain control over Venezuelan PDVSA and achieve a disbalance in the situation taking place in Iran, then the National Security Strategy of 2017 (a simultaneous attack on the interests of all nation states Washington designated as its opponents) will be implemented. In our opinion, such a situation cannot go by a calm and peaceful name; the “Second Cold War” is gaining momentum.
Now the virus has entered this whole scenario. The mosaic that has been diligently laid out by the United States began to crumble together with the price of oil barrels in consequence of the decrease of demand coming from China. By the end of February, the price fell down to $45, which began sounding the alarm for the US shale industry. First things didn’t play out in Venezuela, then a major embarrassment came out of Iran, and now this. It only took Saudi Arabia a single finger snap from Uncle Sam to call an emergency gathering of OPEC+ ministers. Russia’s response was phlegmatic: it’s a pity, but we shall wait while mom brews the coffee.
If we put the interests of US shale companies aside, the situation is not an easy one yet nothing critical. At that time, only China was under the blow of COVID-19 and the assumption that the epidemic would grow into a pandemic was no more than a hypothesis. Russia offered not to fuss but instead to keep an eye on the situation in order to evaluate it, yet ended up agreeing with the Saudis. The meeting took place and Saudi Arabia shunned an ultimatum by demanding a decrease in total production by another 1.5 million barrels per day which meant that production in Russia had to be decreased yet again by an additional 250-300 thousand barrels per day. It is most likely that this should have helped to keep the price range stable and thereby mainly preserving favorable conditions for shale producers. Alexander Novak urgently returned to Moscow and held a meeting with the participation of Vladimir Putin and the heads of leading oil companies directly at the airport. Based on previous events, the decision ended up being no less stringent than Saudi Arabia’s ultimatum: the gentlemen of OPEC were kindly invited to go f themselves.
We are being scared off, but are we frightened?
What is it that we are currently witnessing? Saudi Arabia has already cancelled the logistical OPEC+ meeting that was to take place on March 18, 2020. Saudi Aramco has promised its European customers a $5-7 discount per barrel after the expiration of the OPEC+ agreement on April 1st and is threatening to increase its production by 1 million barrels a day. We are commanded to believe in this and to be afraid of it. However, ever since Saudi Aramco’s shares went down on March 9th, they still haven’t gone up again. Why? On March 16th, the company released a new, fresh financial report that leaves quite some room for thought.
“Saudi Aramco’s profit amid falling prices and production volumes of 2019 fell by 21% in comparison to 2018. In this regard, the company will reduce its costs to 20-30 billion USD instead of the previously planned 35-40 billion. We have already taken action to rationalize the capital expenditures planned for 2020.”
One more time: costs will be reduced whilst the KSA government announces an increase in production by 1 million barrels a day. It is quite a bewilderment to reduce investment whilst increasing production. This is not meant for our world anymore, but for some kind of Harry Potter magic in Hogwarts. On March 13th, the oil barrel won back part of its lost price but Saudi Aramco’s stock price fell by 1%. Even loyal share buyers refuse to believe in miracles. For these reasons, it is quite difficult to feel frightened and humiliated before the power of Saudi Aramco. We cannot rule out, however, the fact that the Saudis still have reserves from previously unsold volumes (the price of a cargo of oil supertankers did not just like that suddenly increase to over 200 thousands dollars per day while being nearly 10 times lower at the beginning of the year). This will provide an opportunity to carry out a one-time action in hopes of “breaking down” Russia to the point where it will begin to beg the KSA to be welcomed back to the table of negotiations.
And what about Trump? Trump is diligently trying not to lose face and convince everyone that America is still “Great Again”. However, the planned sale of a part of the US state petroleum reserve got cancelled, because otherwise the prices would have gone even lower. And now Trump has spoken that on the contrary, the state reserve will be purchasing 78 million barrels of oil in the very near future.
“We’re buying at the right price.”
However, here in the dead end of Rotten Junk, it translates completely differently:
“We will attempt to remove part of the oil on the market at government expense in hopes of slightly increasing the prices at the very least.”
The shares of oil companies have fallen twice as much as shares of companies involved in traditional production, that is from 40 to 50% in comparison to 15-20%. This implies that bonds of shale companies will go from a BBB level to a BBB-, which means they will be declared as “junk”. As a consequence, US banks will lose the opportunity to issue new loans to these companies not because of viciousness and greed, but solely because of the country’s legal requirements. US investment funds have thoroughly invested in bonds of oil and shale companies which puts them in a risky position. This is what we get to witness with the trading taking place on the US stock exchanges whose quotes are falling at record rates. The US Department of Energy which is bound to radiate optimism is even starting to lose it. It was confidently stated in January that in 2020, the volume of oil production would reach 13.2 million barrels per day, but now the rhetoric has changed a bit: “Yes, of course, those 13.2 million will be reached but by the end of 2020, the production will decrease to last year’s figures.”
Where there is oil, there is gas
Here is a message from the LNG Industry agency dated March 10, 2020:
“Prices of spot LNG delivered to Japanese terminals last February fell to record levels due to the outbreak of a viral infection, an oversupply on the market and a commissioned warm winter season. On average, these prices fell to about 3.40 USD per million BTU.”
In this current case it doesn’t even make sense to convert this data into the dollars per cubic meter we are so familiar with. The price of gas on the US national exchange HenryHub now fluctuates around $2.0 per million BTU, plus the costs of delivery to the liquefaction plant, liquefaction itself, freight for tankers, gas carriers and transportation costs. The final cost of LNG produced in the United States utterly exceeds the indicated $3.40. Yes, the United States have signed a friendly agreement with China under which China has committed to purchase $50 billion worth of energy resources from the United States every year. However COVID-19 is an unforeseen force majeure event. Consequently, both shale oil and shale gas industrials have found themselves in a difficult situation, and all this falls down right on our Donald Frederovitch’s head in the pre-election year.
Last week, Joe Biden first beat Trump in the presidential race. In response to the question “who will win the elections?” 48% of respondents named Biden and only 45% went for Trump. It is not about the success of the Democratic candidate: the amount of believers in Biden’s victory has grown only by one percentage point. The current president however lost five points due to panic on the markets. Trump already announced that a new idea has dawned on him: it is time to give shale companies soft loans guaranteed by the state. “Great idea, Donald!” said the harsh democratic men.
“No matter how many oil billionaires lose their shirts and call President Trump, House Democrats will stay focused on the real needs of the American people.” said Congressional Appointment Committee spokesman Evan Hollander.
This is an example of a high level of demagogy. The real meaning behind this is pretty obvious: the Democratic majority of Congress is pleased to block Trump’s initiative in order for a few extra advantages in the election race.
Against this backdrop, the calm confidence of Russian leaders looks nothing like the word “completely”. The Prime Minister, the Minister of Finance and the Head of the Central Bank all repeat one after the other that we could deal with prices around $30 per barrel for a period of about 5 to 6 years without harming the budget and national projects. The “fat” accumulated over the OPEC+ years is going to help us, whereas tighten our stomachs in the days of Lent is quite a pious deed. We shall not go deeper into this matter as it ought to be commented by experts in economic issues. We ourselves are limited to oil and gas. We do not have any concrete reason to disagree with the Russian leadership. Our country’s safety margin is much greater than the one of US shales, Saudi Aramco and the KSA state budget. Trump can talk about how much the US economy is going to win benefit from cheap fuel as much as he wants to, but this will not increase oil and LGN exports and the implementation of previously announced projects for construction of new LGN capacities is not quite close to realization.
In 2019, US coal export fell by 20%, which greatly decreases the chances of coal companies giving Trump the same support they did back in November 2016. The bankruptcy of oil and gas shales is yet another prospect from which Biden can only rub his palms. In the anniversary of the coronavirus, it could even turn out to be useful — to Biden, however, not to Trump. Is there a way out of this? Of course there is. It sounds a bit surreal, but its logical: the States have the opportunity to be the first to suggest to resume negotiations in the OPEC+ framework, only with their own participation. By abandoning undercover fights and instead move on to a constructive dialogue, oilmen of Russia, the USA and Saudi Arabia are quite capable of controlling the world market. But by acting individually they can only keep the competition going which, as we see, destroys not only oil quotes but other Dow Jones and Nasdaq as well. There is a choice to be made, though it is to be made carefully. The rescue of a drowning man is up to the drowning man himself, but this, of course, is just our point of view. We do not have any claims to the absolute truth.
Translated by Ellina Hensen
Original text: geoenergetics.ru
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