Putin will start a “war” in the US shale oil industry

Oil prices fell more than 10% on Friday

At 10:16 on Friday morning, wet and dreary, Russia’s energy minister entered the Opep headquarters in central Vienna knowing that his boss was ready to turn the world oil market.

Alexander Novak told his Saudi Arabian counterpart, Prince Abdulaziz bin Salman, that Russia was not willing to further reduce oil production. The Kremlin had decided that propping up prices as the coronavirus devastated energy demand would be a gift to the US shale industry. UU. The fracking had added millions of barrels of oil to the global market, while Russian companies kept the wells inactive. Now was the time to squeeze the Americans.

After five hours of polite but fruitless negotiations, in which Russia clearly outlined its strategy, the talks were interrupted. Oil prices fell more than 10%. Not only the merchants were trapped: the ministers were so shocked that they didn’t know what to say, according to one person in the room.

For more than three years, President Vladimir Putin had kept Russia in the Opep + coalition, allied with Saudi Arabia and the other members of the Organization of Petroleum Exporting Countries, to curb oil production and maintain prices. In addition to helping Russia’s treasure (energy exports are the largest source of state revenue), the alliance brought foreign policy gains, creating a link with Saudi Arabia’s new leader, Crown Prince Mohammed bin Salman.

But the Opep + agreement also helped the shale industry in the United States and Russia was increasingly angry at the Trump administration’s willingness to use energy as a political and economic tool. He was especially upset about the use of sanctions by the US. to prevent the completion of an oil pipeline linking the Siberian gas fields with Germany, known as Nord Stream 2. The White House has also turned to the Venezuelan business of Russian state oil producer Rosneft.

“The Kremlin has decided to sacrifice Opep + to stop US shale producers and punish that country for messing with Nord Stream 2,” said Alexander Dynkin, president of the Institute for World Economy and International Relations in Moscow, a State expert group. “Of course, annoying Saudi Arabia could be a risky one, but this is Russia’s strategy at the moment: flexible interest geometry.”

First not

The Opep + agreement had never been popular among many in the Russian oil industry, who were bothered to have to delay investments in new and potentially profitable projects. In particular, Igor Sechin, the powerful head of Rosneft and a former ally of Putin, pressed against the sidewalks, according to people familiar with the matter, who asked not to be identified discussing private conversations.

The Kremlin was also disappointed because the alliance with Riyadh had not produced large Saudi investments in Russia.

For several months, Novak and his team had been telling Saudi officials that they liked to be in the Opep + alliance, but were reluctant to deepen production cuts, according to people familiar with the relationship. At the last Opep meeting in December, Russia negotiated a position that allowed it to keep production fairly stable, while Saudi Arabia assumed large reductions.

When the coronavirus began to devastate Chinese economic activity in early February, reducing oil demand in Saudi Arabia’s largest customer by 20%, Prince Abdulaziz tried to convince Novak that they should call an early Opep meeting + in response to reduced supply. Novak said no. The Saudi king and Putin talked on the phone, it didn’t help, as the virus spreads.

In the worst year for oil demand since the global financial crisis, the Saudi camp hoped that Moscow could be won at the next scheduled Opep meeting in early March. The Russians did not rule out deeper and deeper cuts, but continued to insist that shale producers should share the pain. Putin, who has been the final arbiter of Russia’s Opep + policy since the alliance began in 2016, met with oil producers and key ministers last Sunday.

Bad chemistry

When the ministers met in Vienna this week, Saudi Arabia made a final effort to force Russia’s hand. They persuaded the OPEC core group to support a production cut of 1.5 million barrels per day, but they made it contingent for Russia and the other Opep + countries to join. Novak appeared for the last time at the Vienna headquarters where his nervous colleagues were waiting for him, and refused to move.

The crown prince even considered calling Putin on Friday, according to a person familiar with the situation. But Putin’s spokesman made it clear to journalists that he had no plans to get involved. As for the oil ministers of the two countries, there was no personal chemistry between them, according to one person in the room. They didn’t exchange a single smile, said another.

With each escape from the meeting, the price of oil contracted, as traders slowly realized that an agreement was going to be impossible.

Rosneft is delighted with the breakup. Now you can move to increase your market share, spokesman Mikhail Leontiev said.

“If you always give in to the partners, you are no longer partners. It’s called something else, ”he told Bloomberg. “Let’s see how the American shale exploration feels in these conditions.”

But the decision to assume the shale could be counterproductive. While many drillers in Texas and other bituminous shale regions are vulnerable, as they are too indebted and already mistreated by natural gas prices, significant declines in US production can take time.

The largest US oil companies, Exxon Mobil Corp. and Chevron Corp., now control many oil shale wells and have the balance sheets to support lower prices. Some smaller drillers may close, but many will have bought financial hedges against the fall of crude.

In the short term, Russia is in a good position to resist a fall in the price of oil. The budget equals a price of US $ 42 per barrel and the finance ministry has hidden billions in a rainy day fund. However, the impact of the coronavirus on the global economy is still unclear and with millions of more barrels about to flood the market, Wall Street analysts warn that oil could test the recent lows of US $ 26 per barrel.

In Saudi Arabia, where the government relies almost entirely on oil to finance public spending, the economic impact will be immediate. Prince Abdulaziz and his half-brother, Crown Prince Mohammed, will have all the incentives to increase production to maximize revenue as prices fall.

“Prices will fall until Moscow or Riyadh cancel the resistance contest” or US production is massively reduced, said Bob McNally, president of Rapidan Energy Advisors and former member of the National Security Council staff.

Relations between the two energy ministries remain cordial and the diplomatic mechanisms of the Opep + group are still in place, keeping the door open in case the two sides decide to meet. Novak told his teammates on Friday that Opep + is not over.

But a picture of the conference room after the delegates had left indicated a different story: the little Russian flag next to Novak’s seat had been torn down and Prince Abdulaziz left his counterparts with a grave warning: trust me, He told them, according to one person in the room: this will be an unfortunate day for all of us.

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