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The United States fears that Saudi Arabia, the world’s largest crude oil exporter, may not have enough reserves to prevent oil prices escalating, confidential cables from its embassy in Riyadh show.

The cables, released by WikiLeaks, urge Washington to take seriously a warning from a senior Saudi government oil executive that the kingdom’s crude oil reserves may have been overstated by as much as 300 billion barrels — nearly 40%.

The revelation comes as the oil price has soared in recent weeks to more than $100 a barrel on global demand and tensions in the Middle East. Many analysts expect that the Saudis and their OPEC cartel partners would pump more oil if rising prices threatened to choke off demand.

However, Sadad al-Husseini, a geologist and former head of exploration at the Saudi oil monopoly Aramco, met the US consul general in Riyadh in November 2007 and told the US diplomat that Aramco’s 12.5 million barrel-a-day capacity, needed to keep a lid on prices, could not be reached.

Tapping the truth

According to the cables, which date between 2007-09, Husseini said Saudi Arabia might reach an output of 12 million barrels a day in 10 years but before then — possibly as early as 2012 — global oil production would have hit its highest point. This crunch point is known as “peak oil“.

Husseini said that at that point Aramco would not be able to stop the rise of global oil prices because the Saudi energy industry had overstated its recoverable reserves to spur foreign investment. He argued that Aramco had badly underestimated the time needed to bring new oil on tap.

…click on the above link to read the rest of the article…

Low prices batter oil industry (and later the rest of us)

December 1, 2020

Low prices batter oil industry (and later the rest of us)

It is a sign of the times that the largest oil company in the world, Saudi Aramco, the state oil company of the Kingdom of Saudi Arabia, must borrow money to pay its shareholder dividend. I have written about the twice-delayed and often troubled initial public offering of the company previously (here and here).

Now it seems that the cash which the company is generating from operations is far less than the dividend payout—which leaves nothing for new drilling to replace reserves and other capital expenditures needed to keep the company going. Hence, the need to borrow.

All of this is due, in part, to low oil prices. And, the Saudis are not the only ones suffering, of course. U.S. producers, mostly those focused on high-cost shale deposits, continue to head toward bankruptcy or merge with other stronger companies. Another part of the equation is heavy debt. Naive investors kept handing over fresh capital, oblivious to the fact that the shale oil and gas industry as a whole has been free cash flow negative for years. That’s okay for a few years, but as a long-run strategy it means a company is simply consuming the capital of its investors.

So, what does this mean for the economy and society as a whole? Normally, such developments, while bad for the industry, would be interpreted as a boon for the rest of society. After all, cheap energy means cheap fuel for consumers and business owners and more money to spend on other things. It also means lower costs for everything we make and buy since all products require energy to produce.…click on the above link to read the rest of the article…

…click on the above link to read the rest of the article…

Oil Price Crash Costs Saudi Arabia $27.5 Billion In Revenue In 2020

November 14, 2020

Oil Price Crash Costs Saudi Arabia $27.5 Billion In Revenue In 2020

The oil price collapse is depriving Saudi Arabia of US$27.5 billion in oil revenues this year, Saudi Crown Prince Mohammed bin Salman said on Friday, admitting that the current oil income is not enough to cover the Kingdom’s salaries bill.

Saudi Arabia had projected last year that this year’s revenues for the state would be US$222 billion (833 billion Saudi riyals), of which US$137 billion (513 billion riyals) would come from oil, the crown prince said in a speech carried by the official Saudi Press Agency.

However, after the collapse in oil prices, Saudi Arabia’s oil revenues actually dropped to US$109 billion (410 billion riyals), Mohammed bin Salman said.

Thus, the price crash—which Saudi Arabia itself helped to create by flooding the market with oil in April—cost the world’s top oil exporter just over US$27.5 billion in oil revenues this year.

“These revenues alone are insufficient to cover even the salaries bill estimated at 504 billion riyals in this year’s budget, not to mention the difficulty of financing other items which include capital spending by 173 billion riyals and social security benefits by 69 billion riyals as well as operation and maintenance bill estimated at 140 billion riyals and others, which means an economic recession and millions of jobs lost,” Mohammed bin Salman said in his speech.

The collapse in oil prices has forced the Kingdom to take some very unpopular measures such as tripling the value-added tax (VAT), reducing payouts to poorer households, and discontinuing cost-of-living allowances for state workers.

Earlier this week, Fitch Ratings revised down its the outlook on Saudi Arabia’s long-term foreign-currency Issuer Default Rating (IDR) to ‘negative’ from ‘stable’, citing “the continued weakening of its fiscal and external balance sheets, which has been accelerated by the coronavirus pandemic and lower oil prices, despite the government’s strong commitment to fiscal consolidation.”

The Debt Crisis Is Mounting For Oil Economies

September 23, 2020

The Debt Crisis Is Mounting For Oil Economies

Dubai. Abu Dhabi. Bahrain. And, of course, Saudi Arabia. The two emirates this year issued debt for the first time in years. So did Bahrain. Saudi Arabia stepped up its debt issuance. The moves are typical for the oil-dependent Gulf economies. When the going is good, the money flows. When oil prices crash, they issue debt to keep going until prices recover. This time, there is a problem. Nobody knows if prices will recover.

In August, Abu Dhabi announced plans for what Bloomberg called the longest bond ever issued by a Gulf government. The 50-year debt stood at $5 billion, and its issuance was completed in early September. The bond was oversubscribed as proof of the wealthiest Emirate’s continued good reputation among investors.

Dubai, another emirate, said it was preparing to issue debt for the first time since 2014 at the end of August. Despite the fact the UAE economy is relatively diversified when compared to other Gulf oil producers, it too suffered a hard blow from the latest oil price crash and needed to replenish its reserves urgently. Dubai raised $2 billion on international bond markets last week. Like Abu Dhabi’s bond, Dubai’s was oversubscribed.

Oversubscription is certainly a good sign. It means investors trust that the issuer of the debt is solid. But can the Gulf economies remain solid by issuing bond after bond with oil prices set to recover a lot more slowly than previously expected? Or could this crisis be the final straw that tips them into actual reforms?

…click on the above link to read the rest of the article…

Saudi Arabia Refuses To Learn From Its Two Failed Oil Price Wars

August 21, 2020

Saudi Arabia Refuses To Learn From Its Two Failed Oil Price Wars

Having failed to achieve the slightest semblance of success in the two oil price wars that it started – the first running from 2014 to 2016, and the second running from the beginning of March to effectively the end of April this year – it might be assumed that key lessons might have been learned by the Saudis on the perils of engaging in such wars again. Judging from various statements last week, though, Saudi Arabia has learned nothing and may well launch exactly the same type of oil price war in exactly the same way as it has done twice before, inevitably losing again with exactly the same catastrophic effects on it and its fellow OPEC members. At the very heart of Saudi Arabia’s problem is the collective self-delusion of those at the top of its government regarding the Kingdom’s key figures relating to its oil industry that underpins the entire regime. These delusions are apparently not discouraged by any of the senior foreign advisers who make enormous fees and trading profits for their banks from Saudi Arabia’s various follies, most notably oil price wars. It is, in the truest sense of the phrase, a perfect example of ‘The Emperor’s New Clothes’, although in this case, it does not just pertain to Crown Prince Mohammed bin Salman (MbS) but to all of the senior figures connected to Saudi Arabia’s oil sector. One of the most obvious examples of this is the chief executive officer of Saudi Arabia’s flagship hydrocarbons company, Saudi Aramco (Aramco), Amin Nasser, who said last week – bewilderingly for those who know even a modicum about the global oil markets – that Aramco is to go ahead with plans to increase its maximum sustained capacity (MSC) to 13 million barrels per day (bpd) from 12.1 million bpd.

…click on the above link to read the rest of the article…

How Saudi Arabia Caused The Worst Oil Price Crash In History

June 18, 2020

How Saudi Arabia Caused The Worst Oil Price Crash In History

Saudi Arabia made good on its promise to flood the market with oil after the collapse of the previous OPEC+ deal in early March.
The Kingdom’s oil exports jumped by 3.15 million bpd to 11.34 million bpd in April.

Saudi Arabia made good on its promise to flood the market with oil after the collapse of the previous OPEC+ deal in early March, exporting a record 10.237 million barrels per day (bpd) in April 2020, up from 7.391 million bpd in March, data from the Joint Organisations Data Initiative (JODI) showed.

Total oil exports from Saudi Arabia, including crude oil and total oil products, also soared in April – by 3.15 million bpd to 11.34 million bpd, mostly due to the surge in crude oil exports, according to the data released by the JODI database, which collects self-reported figures from 114 countries.

Production at the world’s top crude oil exporter also jumped in April—to over 12 million bpd, at 12.007 million bpd, the database showed.

After flooding the market with oil in April and contributing to the oil price crash, OPEC’s de facto leader and largest producer, Saudi Arabia, agreed that same month to a new round of OPEC+ cuts in response to the demand crash and plunging oil prices. Saudi Arabia had to reduce its oil production to 8.5 million bpd in May and June under the OPEC+ deal for removing 9.7 million bpd of collective oil production from the market.

According to OPEC’s secondary sources in the latest Monthly Oil Market Report (MOMR), Saudi Arabia slashed its crude oil production in May to the required level of 8.5 million bpd.

…click on the above link to read the rest of the article…

Oil Price War Puts Entire Kingdom Of Saudi Arabia At Risk

May 14, 2020

Oil Price War Puts Entire Kingdom Of Saudi Arabia At Risk

At no time since Ibn Saud first consolidated his Arabian conquests into the Kingdom of Saudi Arabia in 1932 has the ruling Saud dynasty faced such an existential threat to its continued rule over the country.

It is true that Saudi Arabia has been able to gain some temporary advantage in key Asian export markets, as its shipments to China more than doubled in April to 2.2 million barrels a day (bpd) and those to India, at 1.1 million bpd, were also the highest in at least three years. This, though, as much as any other factor that might endure, was a product of Saudi slashing its official selling prices (OSPs) for April crude sales to some of the lowest levels in decades, undercutting its rivals, and exactly the same happened again for May crude sales.

Even this very slight victory, though, has already been jeopardised by an indication that the scale of the trouble into which the House of Saud has placed Saudi Arabia is truly monumental. Just last week saw massive economic pressure force the Saudis into increasing the June delivery price for its Arab light crude oil to Asia by US$1.40 per barrel from May, albeit at a discount of US$5.90 to the Oman/Dubai benchmark average. Market expectations were that Saudi would continue to keep OSPs low to hold onto market gains.

Saudi Arabia did this because its finances are in an even worse state now than they were at the end of the Kingdom’s previous attempt to destroy the U.S. shale industry that ran disastrously from 2014 to 2016. Back then, Saudi had a much greater chance of success in destroying the U.S. shale industry than it did this year, for a wide variety of reasons, but even then the effort nearly destroyed the Saudi economy forever.

…click on the above link to read the rest of the article…

US To Remove Patriot Missile Protection From Saudi Arabia Amid Oilpocalypse

May 7, 2020

US To Remove Patriot Missile Protection From Saudi Arabia Amid Oilpocalypse

Petrodollar panic?

As tensions between OPEC (cough – the Saudis – cough) and Washington rise over the supply (and price) of oil globally amid a pandemic-driven demand collapse, it would appears President Trump may have just gone ‘nuclear’.

“…there will be blood.”

The Wall Street Journal reports that The U.S. is removing Patriot anti-missile systems from Saudi Arabia and is considering reductions to other military capabilities – marking the end, for now, of a large-scale military buildup to counter Iran, according to U.S. officials.

As a reminder, OilPrice.com’s Simon Watkins warned last week that President Donald Trump was considering all options available to him to make the Saudis pay for the oil price war as the crash that followed has done significant damage to the U.S. oil industry.

With last month having seen the indignity of the principal U.S. oil benchmark, West Texas Intermediate (WTI), having fallen into negative pricing territory, U.S. President Donald Trump is considering all options available to him to make the Saudis pay for the oil price war that it started, according to senior figures close to the Presidential Administration spoken to by OilPrice.com last week. It is not just the likelihood that exactly the same price action will occur to each front-month WTI futures contract just before expiry until major new oil production cuts come from OPEC+ that incenses the U.S. nor the economic damage that is being done to its shale oil sector but also it is the fact that Saudi is widely seen in Washington as having betrayed the long-standing relationship between the two countries. Right now, many senior members on Trump’s closest advisory circle want the Saudis to pay for its actions, in every way, OilPrice.com understands.

…click on the above link to read the rest of the article…

Trump Could Use ‘Nuclear Option’ To Make Saudi Arabia Pay For Oil War

April 29, 2020

Trump Could Use ‘Nuclear Option’ To Make Saudi Arabia Pay For Oil War

US Saudi flags

President Donald Trump is considering all options available to him to make the Saudis pay for the oil price war as the crash that followed has done significant damage to the U.S. oil industry

With last month having seen the indignity of the principal U.S. oil benchmark, West Texas Intermediate (WTI), having fallen into negative pricing territory, U.S. President Donald Trump is considering all options available to him to make the Saudis pay for the oil price war that it started, according to senior figures close to the Presidential Administration spoken to by OilPrice.com last week. It is not just the likelihood that exactly the same price action will occur to each front-month WTI futures contract just before expiry until major new oil production cuts come from OPEC+ that incenses the U.S. nor the economic damage that is being done to its shale oil sector but also it is the fact that Saudi is widely seen in Washington as having betrayed the long-standing relationship between the two countries. Right now, many senior members on Trump’s closest advisory circle want the Saudis to pay for its actions, in every way, OilPrice.com understands.

This relationship was established in 1945 between the U.S. President Franklin D. Roosevelt and the Saudi King at the time, Abdulaziz, on board the U.S. Navy cruiser Quincy in the Great Bitter Lake segment of the Suez Canal and has defined the relationship between the two countries ever since. As analysed in depth in my new book on the global oil markets, the deal that was struck between the two men at that time was that the U.S. would receive all of the oil supplies it needed for as long as Saudi Arabia had oil in place, in return for which the U.S. would guarantee the security of the ruling House of Saud.

…click on the above link to read the rest of the article…

The Saudi-Russian oil price war tag team: Are things what they seem?

April 13, 2020

The Saudi-Russian oil price war tag team: Are things what they seem?

To the casual observer Saudi Arabia and Russia, two of the top three producers of oil in the world, have been having a spat about what to do about low oil prices. (See here and here.) Each has accused the other of bad faith and counterproductive behavior. But is that merely what the two oil powers want you to believe?

We’ve been here before. Throughout most of 2016 Saudi Arabia and Russia put on a two-person show for the entire world, pretending time after time to move close to an agreement to lower production in order to prop up oil prices, only to back away or delay at the last minute. The two kept this up for most of 2016. They incited periodic spikes in the oil price without ever having to cut one barrel of production, spikes that kept prices higher for weeks until they drifted back down to levels that reflected reality.

But I believe the most important thing they were trying to achieve then was to create an atmosphere of continuing uncertainty. That uncertainty was supposed to scare investors and lenders away from U.S. shale oil producers who were still hurting from an oil price collapse that began at the end of 2014. Saudi Arabia and Russia wanted to prevent those producers from resurrecting U.S. production and undermining oil prices again. Simply stated, Saudi Arabia and Russia wanted the shale oil industry to go bust in a way that would prevent a recovery for many years.

But investors and lenders could not be frightened away, and they resumed financing shale oil operations in the United States.

…click on the above link to read the rest of the article…

Oil Turns Negative After Russia, Saudis Agree To Cap Output At 8.5MM B/D For 2 Months

April 9, 2020

Oil Turns Negative After Russia, Saudis Agree To Cap Output At 8.5MM B/D For 2 Months

Update (1350ET): What started off euphorically, has quickly become R-OPEC’s latest dud, with oil now sliding red on the day after earlier surging more than 10%, following the latest news out of the oil producerteleconference, according to which Russia and Saudi Arabia agree to cap production to 8.5MM b/d, indicating a production cut of about 23% each, and which will last for just two months, May and June.

Furthermore, as Iran’s oil minister explains, the total cut of 10MMb/d (which will include several non Russia/Saudi producers) will ease to 8MMb/d in July and then after Jan 2021, the cut will decline to just 6 million b/d production cut.

In a nutshell, R-OPEC is hoping for two things: i) oil demand will rebound after the summer and the oil market will stabilize organically as the global economy recovers from the coronavirus and ii) the US and other G20/non-OPEC producers join the cuts voluntarily, which however is far from assured.

Meanwhile, even with the 10mm b/d cut (which is really about 7 millions if one uses Saudi Arabia’s Feb production numbers) will be nowhere near enough to offset the global demand plunge which according to industry watchers such as Trafigura is as large as 35mmb/d!

And now that the initial euphoria has worn off and traders are able to do math again – and realize that the cuts are not nearly enough – oil has slumped and was trading in the red last as once again, OPEC has failed to live up to the hype.

Finally, as a reminder, here is why Goldman believes that after today’s pomp and circumstance, oil is still going to $20:

…click on the above link to read the rest of the article…

The OPEC Meeting Could Send Oil Prices Crashing Below $10

April 5, 2020

The OPEC Meeting Could Send Oil Prices Crashing Below $10

OPEC Meeting

The current optimism of analysts and the media that an end to the ongoing OPEC+ oil price spat is near is entirely unjustified. The ongoing oil market volatility, the battle between leading producers for market share, the logistical impossibility of enforcing U.S. production cuts, and the continued demand destruction caused by COVID-19 are not issues that can be solved by an OPEC meeting. Immediately after Trump’s latest OPEC twitter offensive, Saudi Arabia and Russia came out with critical statements about the impact and influence of the US president on the matter. While Putin and Mohammed bin Salman are reluctant to bash Trump, the real power when it comes to the oil market does not lie with the U.S. President. The tweet by Trumpclaiming that MBS and Putin would agree to a 10+ million bpd production cut shows not only his overestimation of his own power over the two countries, but also shows a lack of knowledge about the underlying market fundamentals and the current demand destruction worldwide. As former US president George W. Bush stated during his election campaign, which did not end well as we know, “it’s the economy stupid” that matters in the end. Trump’s tweets and general approach to this matter suggests he and his administration are out of touch with reality. Even if a Saudi-Russian combination would cut 10 million bpd, the oil price reaction would be minimal and very short-lived. At present, leading oil market experts such as Vitol, Trafigura and Goldman Sachs are warning of a total demand destruction of 20 million bpd or more.

…click on the above link to read the rest of the article…

Whiting Petroleum Files For Prepackaged Bankruptcy

April 1, 2020

Whiting Petroleum Files For Prepackaged Bankruptcy

Talk about a coincidence: just as we were discussing why April would be “apocalyptic” for the oil industry, as Saudi Arabia just unleashed an unprecedented record amount of oil to buyers in a scramble to put its high-priced competitors out of business, warning that “countless oil producers would file for bankruptcy”, former shale darling Whiting Petroleum did just that, filing a pre-packaged Chapter 11 deal in the Southern District of Texas Bankruptcy Court after reaching an agreement with certain note holders to pursue a “comprehensive” and “consensual” financial restructuring.

Whiting, which in Q4 pumped 123,000 bpd of which 80,000 bpd was nat gas, said it concluded that given a “severe downturn” in oil and gas prices resulting from the Saudi Arabia-Russia oil price war and COVID-19-related impact on demand a financial restructuring was the “best path forward.” Creditors may disagree: the company’s bonds due March 2021 were trading at par as recently as mid-January, even though we warned as far back as 2015 that it would be the first company to go under: truly a testament to how idiotic the junk bond market has been for the past 4 years.

The company said that the plan provides for de-leveraging of capital structure by more than $2.2 billion, and listed $1-$10 billion in debt and more than $585 million of cash on its balance sheet, noting that it expects to have sufficient liquidity to meet its financial obligations during the restructuring without the need for additional financing.

More importantly, it will continue to operate its business and pump oil for the duration of the Chapter 11 proceedings, meaning that oil production won’t decline by even one drop.

The bankruptcy press release is below:

…click on the above link to read the rest of the article…

The Unthinkable Is Happening: Oil Storage Space Is About To Run Out

March 29, 2020

The Unthinkable Is Happening: Oil Storage Space Is About To Run Out

In the past three weeks, oil plunged and has continued to plunge even more in the aftermath of the oil price war declared between Saudi Arabia and Russia, and where US shale (and its junk bonds) has been caught in the crossfire. However, as we reported last week, we may get to the absurd point when the price of a barrel of oil not only hits $0 but goes negative.

The reason: according to Mizuho’s Paul Sankey, at a whopping 15MM b/d in oversupply, crude prices could go negative as Saudi and Russian barrels enter the market. According to Sankey, much of the US 4MM bpd in crude exports will be curtailed as prices fall and tanker rates soar. And with US storage roughly 50% full, and able to take another 135MM bbl more, assuming a build rate of 2MM b/d, the US can add 14MM bbl/week for 10 weeks until full.

As a result, there is a now race between filling storage and negative pricing “unless U.S. decline rates can outpace inventory builds, which we very much doubt.” Said otherwise, absent dramatic changes, in roughly 3 months, energy merchants will be paying you if you generously take a couple million barrels of crude off their hands.

It went from bad to an outright disaster earlier this week when Goldman, Vitol, and the IEA all raised their estimate for daily oil oversupply to an unthinkable 20 million barrels per day, as a result of the collapse in oil demand as the global economy grinds to a halt coupled with Saudi Arabia’s determination to put all of its higher-cost OPEC peers out of business.

…click on the above link to read the rest of the article…

The Inevitable Outcome Of The Oil Price War

March 20, 2020

The Inevitable Outcome Of The Oil Price War

One might reasonably posit that when Crown Prince Mohammed bin Salman (MbS) signalled that Saudi Arabia was once again going to produce oil to the maximum to crash oil prices in a full-scale oil price war, Russian President Vladimir Putin probably fell off the horse he was riding bare-chested somewhere in Siberia because he was laughing so much. There is a phrase in Russian intelligence circles for clueless people that are ruthlessly used without their knowledge in covert operations, which is ‘a useful idiot’, and it is hard to think of anyone more ‘useful’ in this context to the Russians than whoever came up with Saudi’s latest ‘plan’. Whichever way the oil price war pans out, Russia wins.

In purely basic oil economics terms, Russia has a budget breakeven price of US$40 per barrel of Brent this year: Saudi’s is US$84. Russia can produce over 11 million barrels per day (mbpd) of oil without figuratively breaking sweat; Saudi’s average from 1973 to right now is just over 8 mbpd. Russia’s major oil producer, Rosneft, has been begging President Putin to allow it to produce and sell more oil since the OPEC+ arrangement was first agreed in December 2016; Saudi’s major oil producer, Aramco, only suffers value-destruction in such a scenario. This includes for those people who were sufficiently trusting of MbS to buy shares in Aramco’s recent IPO. Russia can cope with oil prices as low as US$25 per barrel from a budget and foreign asset reserves perspective for up to 10 years; Saudi can manage 2 years at most.

…click on the above link to read the rest of the article…

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