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The Debt Crisis Is Mounting For Oil Economies

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?

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“It’s Happening Again” – Traders Store Oil At Sea As Recovery Falters

Crude prices slid Thursday as the stalled global economic recovery from the virus pandemic triggers a “second wave” of demand fears and sparks renewed interest in floating storage as the oil market flips bearish.

Reuters said a “fresh build-up of global oil supplies, pushing traders including Trafigura to book tankers to store millions of barrels of crude oil and refined fuels at sea again.”

Floating storage, onboard crude tankers, comes as traditional onshore storage nears capacity as supply outpaces demand.

Total Oil Inventories 

Refinitiv vessel data shows trading house Trafigura has recently chartered at least five crude tankers, each capable of 2 million barrels of oil.

The inventory build up, driving up demand for floating storage comes as OPEC+ recently trimmed supply curbs from earlier this year on expectations demand would improve. Though with the peak summer driving season in the US now over, demand woes and oversupplied markets are pressuring crude and crude product prices.

Very large crude-oil carrier (VLCC) storage has started to rise once again.

“Despite the recent slide in oil prices, we think that the OPEC+ leadership will continue to direct its efforts towards securing better compliance rather than pushing for deeper cuts at this stage,” RBC analysts said.

Another catalyst for the bearish tilt in crude markets is that China’s oil imports are likely to subside as independent refineries have reached maximum annual oil import quotas.

Reuters notes, in a separate report, that other top commodity traders are booking tankers to store crude products at sea, including diesel and gasoline.

Refinitiv vessel data also shows Vitol, Litasco, and Glencor have been booking tankers in the last several days to store diesel for the next three months.

“The market is soft and bearish, and floating storage is returning again,” a market source told Reuters.

Private Equity Is Bargain Hunting In Canada’s Oil Patch

Private Equity Is Bargain Hunting In Canada’s Oil Patch

After two months of an encouraging—if not half-hearted–rebound, oil prices have gone into reverse gear once again. Futures tied to WTI crude were down a whopping 8% on Monday morning to trade at $36.35/barrel, a level they last touched two months ago as the markets come under a fresh wave of pressure from a stalling recovery in demand as well as a mistimed expansion of production by OPEC that threatens to reverse the gains by the cartel’s latest production cuts.  The latest rout has elicited another round of price cuts by Saudi Arabia in a situation eerily reminiscent of the oil price war that sent the markets crashing into negative territory for the first time ever.

But as the debt-riddled U.S. shale patch braces for a new reality of ‘Lower Forever’ with massive asset writeoffs amid a growing wave of bankruptcies, its equally distressed neighbor further north has resorted to a different trick: Mergers and Acquisitions.

Starved of vital capital by weary banks and shareholders, small- and mid-sized oil and gas companies in Canada are scrambling to find partners in a bid to become bigger and– hopefully–more solvent.

Meanwhile, bargain-hunting private equity firms have pounced on the opportunity, hoping to buy distressed assets for pennies on the dollar.

WTI Oil Price 30-Days Change

Source: Business Insider

Source: Visual Capitalist

Orphaned Businesses

After years of continuous underperformance and paltry returns following a six-year downturn by the sector, cheap credit for Canada’s oil and gas companies has dried up, forcing them to look for less conventional means to survive.

The Covid-19 crisis has only served to worsen the situation, with the S&P/TSX Capped Energy–Canada’s equivalent of the U.S.’ Energy Select Sector SPDR Fund (XLE)–down 46.8% in the year-to-date vs. -41.9% return by XLE.

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Today’s Energy Predicament – A Look at Some Charts

Today’s Energy Predicament – A Look at Some Charts

Today’s energy predicament is a strange situation that most modelers have never really considered. Let me explain some of the issues I see, using some charts.

[1] It is probably not possible to reduce current energy consumption by 80% or more without dramatically reducing population.

A glance at energy consumption per capita for a few countries suggests that cold countries tend to use a lot more energy per person than warm, wet countries.

Figure 1. Energy consumption per capita in 2019 in selected countries based on data from BP’s 2020 Statistical Review of World Energy.

This shouldn’t be a big surprise: Our predecessors in Africa didn’t need much energy. But as humans moved to colder areas, they needed extra warmth, and this required extra energy. The extra energy today is used to build sturdier homes and vehicles, to heat and operate those homes and vehicles, and to build the factories, roads and other structures needed to keep the whole operation going.

Saudi Arabia (not shown on Figure 1) is an example of a hot, dry country that uses a lot of energy. Its energy consumption per capita in 2019 (322 GJ per capita) was very close to that of Norway. It needs to keep its population cool, besides running its large oil operation.

If the entire world population could adopt the lifestyle of Bangladesh or India, we could indeed get our energy consumption down to a very low level. But this is difficult to do when the climate doesn’t cooperate. This means that if energy usage needs to fall dramatically, population will probably need to fall in areas where heating or air conditioning are essential for living.

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

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.

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Why Fracking Activity Hasn’t Increased As Oil Prices Recovered

Why Fracking Activity Hasn’t Increased As Oil Prices Recovered

It’s been a long dry spell in the Permian. Shale drilling and completions activity has collapsed to levels not seen since before 2000 (as far back as records are kept). That was the year shale activity first began to pick up from essentially nil and hit all-time peaks in 2008. With occasional ebbs and flows, it had gradually drifted down to the start of the current calamity, where active rigs stood at a somewhat healthy 805 rigs turning to the right. 

Fracking has also taken a commensurate dive over the last eight months, defying the conventional wisdom that as prices began to improve, activity would increase. It hasn’t happened in either case. Why?

Driven by low prices not seen much in modern history, formerly high-flying shale drillers like Chesapeake Energy have gone bankrupt. The service providers who do the actual work like Halliburton, (NYSE:HAL), Schlumberger, (NYSE:SLB) have written off tens of billions worth of fracking-related equipment, closed facilities and laid off thousands of workers.

Much of the expansion from 2016 onward was fueled by growth at any cost mindset in the drillers, and aided by bankers willing to accept ever-increasing estimates for the value of reserves. In 2018 much of that laissez-faire mentality in the boardrooms of the drillers and in the vaults of the bankers came to an abrupt halt as profits and cash flow were demanded. That was the moment shale activity began to falter numerically, while at the same time, a miracle was taking place. Production grew from advances in technology and a deeper understanding of key reservoirs to record levels.

EIA-STEO

Peaking at nearly 13 mm BOE in March of this year, a failure of OPEC+ nations to agree on production cuts that same month, led oil to begin a precipitous decline in price.

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Oil Price Crash Sparks A Wave Of Banking Mergers In The Middle East

Oil Price Crash Sparks A Wave Of Banking Mergers In The Middle East

The historic oil price crash and Covid-19 pandemic have left major producers of the commodity in a deep economic crisis. Dramatic production cuts by OPEC+ has exacerbated the situation by further lowering export inflows for economies that depend heavily on oil dollars. Some, such as the UAE, have tried to put on a brave face by touting the strength of their banking systems and claiming they can withstand shocks of any scale.

Unfortunately, a growing body of evidence suggests pretty much the opposite: A wave of banking mergers is sweeping through the Middle East as the sector scrambles to stay afloat amid slowing economic growth.

About $440 billion worth of deals are already on the table. That’s a remarkable feat for a region that has the lowest banking penetration anywhere on the globe. 

Interestingly, Saudi Arabia–guilty of initiating the oil price war with Russia that triggered the oil price crash–is well represented in the growing trend.

Source: World Bank

Giant mergers

Source: Bloomberg

#1 Saudi Arabia The National Commercial Bank, Saudi Arabia’s largest lender by assets, has lined up a $15.6 billion takeover bid for rival Samba Financial Group. The $15.6B tab represents a nearly 30% premium to Samba’s valuation before the deal was announced, while the potential deal will create a $210 billion (assets) behemoth.

The Saudi Arabian Monetary Authority, the Kingdom’s central bank, has unveiled nearly $27 billion in stimulus packages to support its flagging banking system suffering from years of weak private sector loan growth. The Kingdom’s oil and gas sector accounts for 50% of GDP and 70% of export earnings. The IMF has estimated Saudi Arabia’s fiscal breakeven sits at $76.1 per barrel, a far cry from the current ~$40/bbl.

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Huge Debt Payments Come At Worst Time Possible For Canadian Drillers

Huge Debt Payments Come At Worst Time Possible For Canadian Drillers

The collapse in oil prices has significantly deteriorated Canada’s oil companies’ finances and has made repaying their debt more challenging. Over the past decade, Canadian firms have borrowed money to survive the previous oil crisis of 2015-2016 and boost production post-crisis. But now the second price collapse in less than five years is leaving Canada’s oil patch, especially the smaller players, extremely vulnerable as debt maturities approach.   

This year, the oil crash coincides with the highest-ever annual debt maturities in the Canadian energy sector, according to Refinitiv data cited by Reuters. In 2020, oil and gas firms have to repay US$3.7 billion (C$5 billion) in debt maturities, up by 40 percent compared to last year.  

The debt pressure adds to the Canadian energy sector’s new predicament with low oil prices, low cash flows, and low overall demand for crude oil due to the coronavirus pandemic.

Some companies are set to default on debts, while others are looking at restructuring options and refinancing. Banks are not generally too keen to own energy assets. But the banks may be the ultimate judge of who can refinance, who can stay afloat, or who can go belly up in this crisis, legal and industry professionals told Reuters.

Some of Canada’s oil and gas firms had not overcome the previous crisis when this one hit.

According to Bank of Canada’s recent Financial System Review—2020, the COVID-19 crisis led to widespread financial distress in all sectors, but “Canada is also grappling with the plunge in global oil prices, which hit while many businesses in the energy sector were still recovering from the 2014–16 oil price shock.”

The energy sector has the most refinancing needs over the next six months, at US$4.43 billion (C$6 billion), and faces the most potential downgrades, according to Bank of Canada.

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How Saudi Arabia Caused The Worst Oil Price Crash In History

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.  

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Canadian Banks Hit Hard By Low Oil Prices

Canadian Banks Hit Hard By Low Oil Prices

Canada’s government has been perhaps surprisingly ready to help the country’s ailing oil industry. Interest-only loans, backstopping loans that troubled companies can’t pay have been among the steps taken so far. But they may not be enough. Canada’s oil industry has arguably suffered more than its peers across its southern border or even most producers around the world. Already cheap because of pipeline troubles, Canadian oil slumped to new lows amid the oil price war and the coronavirus pandemic earlier this year. While it has since improved in line with the international benchmarks, it hasn’t improved enough for the comfort of the local extractive industry. And it may drag banks down with it.

Bloomberg reported earlier this month that Canada’s largest banks reported an almost two-fold increase in impaired energy loans over their second quarter due to the oil price plunge and the pandemic. The increase amounted to more than US$1.47 billion (C$2 billion). What’s more, according to the report the country’s top six lenders had boosted their new lending to energy companies jumped by as much as 23 percent during that same quarter.

“Canadian banks’ energy exposure risks are increasing, with oil in a freefall and Canadian oil producers fighting to survive, as cash burn accelerates and liquidity dwindles,” a Bloomberg Intelligence analyst said in April when banks and companies were both bracing for this year’s renegotiation of borrowing bases amid the price plunge. According to Paul Gulberg, if just a tenth of the loans that Canadian banks had on their books at that time went bad, the lenders could lose a collective US$4.40 billion (C$6 billion).

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Oil Market Heading For Months Of Deficit

Oil Market Heading For Months Of Deficit

The oil market is set for a deficit from August onwards, even after OPEC+ eases the current cuts that are up for a tentative extension through July, Rystad Energy analysts said on Friday.

Assuming that global demand recovery continues in the coming months, the oil market will still be in deficit even after the OPEC+ group relaxes the current cuts from 9.7 million bpd to 7.7 million bpd, as currently planned, Rystad Energy’s Head of Oil Markets, Bjornar Tonhaugen, said, as carried by Oilfield Technology.

“That will ensure a fundamental support for prices, while also spurring a quicker reactivation of curtailed US oil production, and eventually frac crews ending their holidays early,” Tonhaugen said in a note.

“Indications show that a bit more than 300 000 bpd from shut US production is actually coming back online already from June as a result of the current price levels,” he said.

Some U.S. producers have already restarted some curtailed production as prices have rallied in recent weeks and as they need the cash from operations, regardless of how little.

The market deficit coming this summer, however, doesn’t mean that there will be a global oil supply crunch, because inventories and floating storage have yet to begin depleting.

“So, even if demand exceeds supply for a while, that does not mean that we really have a problem to source oil. Oil is there, lots of it, waiting to be drawn from storage facilities,” Rystad Energy’s Tonhaugen said.

Improving global oil demand and faster-than-expected production curtailments from outside the OPEC+ pact are set to push the oil market into deficit in June, according to Goldman Sachs. Yet, there is little room for an oil price rally in the near term because of the still sizeable oversupply of crude oil and refined products, Goldman Sachs said in a note in the middle of May.

Earlier this week, Russia’s Energy Minister Alexander Novak said he expected a shortage in the oil market in July.

Oil Producers May Ditch Old FPSO Offshore Projects In This Downturn

Oil Producers May Ditch Old FPSO Offshore Projects In This Downturn

FPSO

The swift oil price crash caused by the Covid-19 pandemic will reduce the combined free cash flow of FPSO fields, which have produced above three quarters of their original resources at just $2.20 per barrel this year. This is a jaw-dropping decline from 2019’s $11.10 per barrel, a Rystad Energy impact analysis reveals. We also estimate that 40% of the 96 assets which have produced more than 75% of their original resources will end 2020 with a negative cash flow. Given our base case oil price outlook, with prices recovering next year and into 2022, free cash flow will climb back to 2019 levels. However, as these mature fields see production stagnate, free cash flow will quickly return to a decline, ultimately threatening the profitability of many FPSO assets.

“A concern arising for operators is whether the profitability of producing fields will degrade to such an extent that prematurely shutting down ageing fields will prove to be the most rational decision,” says Aleksander Erstad, a Rystad Energy energy service analyst.

Field economics alone are causing headaches for many FPSO operators, but other challenges might also compound the problems.

Unplanned production shut-ins on FPSOs due to Covid-19 outbreaks have already occurred, and continue to be a risk that could seriously harm both the health of individuals and the field’s profitability. Some FPSOs are also the target of supply cuts, a factor which could add to other woes and result in several late producing FPSOs being shut down for good.

Fields utilizing leased FPSOs are in the worst position, with around 70% of late producing assets estimated to have net present values below zero. This puts not only operators in an uncomfortable position, but also FPSO suppliers, who are faced with two possible outcomes – none of which are favorable.

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U.S. Oil Companies Are Cutting Production Much Faster Than Expected

U.S. Oil Companies Are Cutting Production Much Faster Than Expected

Shale Permian

The United States is on track to cut 1.7 million barrels of oil production per day, according to Reuters calculations of state and company data shared on Thursday.

It was U.S. President Donald Trump that suggested at the beginning of April, prior to the most recent OPEC deal signing that the United States would cut its oil output as a natural response to the worsening market conditions. The statement was not initially good enough for OPEC, who wanted more of a commitment from the world’s largest producer and consumer of crude oil.

“Well, I think it’s automatic. Because they’re already cutting. I mean, if you look, they’re cutting back. Because it’s… it’s market. It’s demand. It’s supply and demand. They’re already cutting back, and they’re cutting back very seriously,” U.S. President Trump said at a press briefing early last month.

OPEC+ eventually agreed to cut production by 9.7 million bpd—a landmark figure that is significantly larger than previous OPEC cuts in recent years. Its non-OPEC allies who partnered with OPEC in the deal pledged to cut an additional 10 million bpd.

U.S. Energy Secretary said last month that the DoE expected that production in the United States would fall by between two and three million bpd by the end of the year—it appears the cuts have come even quicker than the department expected.

The need for the production cuts grew more evident as the United States shut down nearly all activity in an attempt to flatten that curve of infections that sought to overwhelm the country’s healthcare system. Doing so, however, has idled much of the economy and crippled demand—and as such, its oil and gas industry that fuels that economy.

The cuts from U.S. producers may seek to quiet the disgruntlement of OPEC and Russia, in particular, who expressed their displeasure that the U.S. would not require its producers to curb production. After all, the U.S. shale industry has benefited greatly from previous rounds of OPEC cuts.

THE END OF A U.S. OIL GIANT: ExxonMobil’s Days Are Numbered

THE END OF A U.S. OIL GIANT: ExxonMobil’s Days Are Numbered

ExxonMobil, the largest oil company in the U.S. and a direct descendant of John D. Rockefeller’s Standard Oil, days are numbered.  The once-great profitable oil giant is now borrowing money just to pay dividends.  How long can this charade go on?

Good question.  Now, some may believe that ExxonMobil was forced to borrow money to pay dividends due to the collapse in oil prices as a result of the global contagion.   However, the company hasn’t been able to pay shareholder dividends from its cash from operations over the past four quarters, even with much higher oil prices.

The leading culprit as to why ExxonMobil lacks the available cash to pay dividends stems from the lousy economics of its U.S. oil and gas wells, especially the company’s shale oil portfolio.  Ever since ExxonMobil ramped up its domestic shale oil production, that’s when the financial troubles at the company began to intensify.

The best way to compare ExxonMobil’s U.S. Upstream (oil and gas wells) performance, BEFORE and AFTER SHALE, is to go back to 2004.  Even though the oil price fell considerably in Q1 2020, it was higher than the oil price in 2004.  For example, ExxonMobil’s U.S. Upstream Sector earned $4.9 billion in 2004 with an average oil price of $41.51 compared to a $704 million loss on a $42.82 oil price:

Furthermore, look at the U.S. oil production differences between 2004 and Q1 2020.  According to ExxonMobil’s 2006 Annual Report, the company’s average U.S. oil production in 2004 was 414,000 barrels per day (bd) versus 699,000 bd in Q1 2020.  Even with higher oil production and similar oil price, ExxonMobil’s U.S. Upstream Earnings in Q1 2020 were dismal in comparison.  Moreover, the company invested $1.9 billion in CAPEX for all of 2004 on its U.S. oil and gas wells compared to the $2.8 billion just for Q1 2020.

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US To Remove Patriot Missile Protection From Saudi Arabia Amid Oilpocalypse

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.

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Olduvai IV: Courage
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Olduvai II: Exodus
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