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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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Oil Price War Claims Another Victim

April 13, 2020

Oil Price War Claims Another Victim

LNG Qatar

The oil price war has already claimed its first victim.

Whiting Petroleum Corp. (NYSE: WLL), once the largest oil and gas producer in North Dakota’s Bakken Shale, has filed for Chapter 11 bankruptcy becoming the first major shale producer to do so in the current year. Whiting has cited the “severe downturn” in oil and gas prices courtesy of the Saudi Arabia-Russia oil price war and COVID-19-related impact on demand.

But this shale producer has no plans to go into a state of suspended animation: Whiting has announced that it will go ahead with full production claiming it has ample liquidity with $585M of cash on its balance sheet and has reached an agreement in principle with certain noteholders for a comprehensive restructuring.

In short, Whiting’s playbook is to buy more time hoping for a rebound in energy prices to bail it out.

WLL shares have jumped 15.1 percent after the bankruptcy announcement–probably an indication that investors believe the company has healthy odds at a comeback. Still, the shares have crashed an appalling 95 percent YTD, making the sector’s 46.9 percent YTD plunge appear tame in comparison. Whiting has announced that existing shareholders holders will only receive 3 percent of the equity in the reorganized company.

The bankruptcy is symptomatic of the sheer pain reverberating throughout the oil supply chainas per Bloomberg.

It also serves as a cautionary tale for the battered natural gas sector which is, sadly, following in the footsteps of Saudi Arabia, Russia and the oil sector by stubbornly refusing to lower production.

Head Fake

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Oil Spikes After Russia Says Ready For “Substantial Output Cut”, But Warns 10MMb/d Cut Not Enough

April 6, 2020

Oil Spikes After Russia Says Ready For “Substantial Output Cut”, But Warns 10MMb/d Cut Not Enough

Over the weekend, following the biggest ever oil short-squeeze in history following rampant hopes that Saudi Arabia and Russia were considering putting their differences aside and cutting up to 10mmb/d in oil output, we said that in a world where oil demand has plunged by as much as a quarter due to the coronavirus pandemic, or as much as 26mmb/d, such a cut would “not be nearly enough to balance the oil market but at least it was a start.”

Then, moments ago, oil which had been drifting in Monday’s session after the report that a new burst of animosity between Saudi Arabia and Russia has pushed back today’s virtual R-OPEC meeting to later in the week, oil spiked after a Reuters rehash of headlines over the past 3 days, namely that Russia is ready to discuss very substantial oil output cuts “due to global demand collapse“, but – just as we warned over the weekend – Russia dded that “global oil output cuts of 10mmbpd might not be enough to balance the market.”

Well, yeah: with demand down 26mmb/d, supply would have to drop by a similar amount to balance the market.

As a result, Dow Jones reported separately that Saudi Arabia has also invited non-OPEC member Norway, UK and Brazil to the summit in hopes of getting everyone nation to agree to cut output, not just R-OPEC and potentially US shale producers. And as DJ also added citing sources, according to OPEC Plus – which now hopes to hold its summit on Friday – the output cuts would be contingent on G-20 cooperation. In short, while Saudi Arabia destroyed OPEC when it flooded the world with oil last month, it now hopes to not only recreate the oil producing cartel to include every single oil producing nation in the world but to convince said cartel to ease production.

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

Texas Or Canada: Where Will Oil Hit $0 First

March 30, 2020

Texas Or Canada: Where Will Oil Hit $0 First

Looking at the future of oil prices, Goldman was downright apocalyptic in its short-term forecast, when in a note published this morning, the bank’s chief commodity strategist Jeffrey Currie speculated that as the current production glut “shock” cripples the crude transportation networks, “a producer would be willing to pay someone to dispose of a barrel, implying negative pricing in landlocked areas.” To wit:

The global economy is a complex physical system with physical frictions, and energy sits near the top of that complexity. It is impossible to shut down that much demand without large and persistent ramifications to supply. The one thing that separates energy from other commodities is that it must be contained within its production infrastructure, which for oil includes pipelines, ships, terminals, storage facilities, refineries, and distribution networks. All of which have relatively small and limited spare capacity. We estimate that the world has around a billion barrels of spare storage capacity, but much of that will never be accessed as the velocity of the current shock will breach crude transportation networks first, which we are already seeing evidence of around the world. Indeed, given the cost of shutting down a well, a producer would be willing to pay someone to dispose of a barrel, implying negative pricing in landlocked areas.

A quick look at two of the most popular landlocked oil producing areas demonstrate that Goldman is spot on, and as the following chart shows as of this moment Texas Midland WTI was trading at just baove $10/barrel, while the price of oil produced in the notoriously landlocked Western Canada, as represented by Canada Western Selected index, was just above $4 per barrel, or a little more than what a gallon of gas costs in California.

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Energy Collapse, Earnings Ennui, & Consumer Credit Cracks

March 30, 2020

Energy Collapse, Earnings Ennui, & Consumer Credit Cracks

Summary:

The energy sector has lost extraordinarily $1.15trn in market value this year as oil prices have plunged to almost unimaginable levels.
In this equity update we provide investors with different ways to play the havoc in the energy sector. We also take a look at earnings this week with especially Carnival earnings being the most interesting to watch as the cruise industry is in a severe crisis due to COVID-19.
Lastly, we focus on consumer credit and the apparent weakness observed in China and how that could be a forewarning of what to come in the US and Europe. As a result we recommend investors to add Mastercard and American Express to their watchlists.

The global energy sector has been punched in the gut by first a slowing economy last year and then this year by an oil price war between Russia and Saudi Arabia. Making things worst the sector is now experiencing an abrupt 20% oil demand reduction equivalent to 20mn barrels a day or the entire consumption of the US. The oil futures curve is in steep contango as the active contract in Brent today went below $23/brl and stories have recently surfaced that physical oil is being transacted at $8/brl and oil storage is running out of capacity. As we talked about on our Market Call this morning the constraint on physical storage and ongoing demand destruction could push the front-end of oil futures down even further.

The current oil price creates extreme shareholder destruction with the MSCI World Energy Index losing $1.15trn in market value this year.

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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.

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Why Saudi Arabia Will Not Win The Oil Price War

April 27, 2016

Why Saudi Arabia Will Not Win The Oil Price War

Crude oil prices continued to surprise on Tuesday, with the U.S. benchmark adding another 4 percent to $44.60 a barrel. West Texas Intermediate is now up 65 percent since hitting 13-year lows below $27 a barrel February 11. It’s a performance only bettered by the globe’s second most traded bulk commodity – iron ore.

But like analysts of the steelmaking raw material, many in the industry have been surprised by the extent of the rally, consistently calling the oil price lower. The blame for the cloudy outlook for crude is mostly being laid at the door of Saudi-Arabia.

After the collapse of the Doha talks to freeze production and amid a spat with the U.S. over terrorism, the world’s top producer has threatened a scorched earth policy when it comes to maintaining and growing its market share.

But there is an alternative view out there that argues that the U.S., more than the Saudis, will control the direction of the market and in the event of an all-out price war holds the commanding position.

That’s thanks to astonishing technological improvements in the U.S. The shale revolution that drove natural gas production between 2010 and 2015, found its way into the oil field, resulting in a 57 percent jump in U.S. crude production in just three short years to peak at 9.7 million barrels per day in April 2015.

(Click to enlarge)

Source: Platts Analytics NG Market Call Long Term, NGL Market Call, and Crude Oil Market Call

And it’s not just a crude story: In the last decade, the U.S. has introduced 8.3 MMBoe/d (million barrels of energy equivalent per day) into the global market when one considers production of crude, natural gas and natural gas liquids according to research by Platts Analytics.

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Saudis Bring Oil War To Europe With Largest Price Discount Since 2009

November 5, 2015

Saudis Bring Oil War To Europe With Largest Price Discount Since 2009

With oil exports to Europe having slipped from 13% of Saudi’s total to just 10% in the last six months, The FT reports, the de facto leader of OPEC has slashed its Official Selling Price (OSP) to Europe in an effort to regain market share. Saudi lowered its OSP for its Arab light crude grade in Europe by $1.30 a barrel for December, taking its discount to the weighted average of the North Sea Brent benchmark to $4.75 a barrel – the largest discount since February 2009.

The move, as we detailed previously, is basically going after Russia’s customer base, has raised heckles in Moscow, with Rosneft CEO Igor Sechin complaining last month about Saudi “dumping” after he revealed the kingdom was selling oil to refineries in Poland.

Chart: Bloomberg

As The FT reports, the de facto leader of Opec, which produces more than one in every ten barrels of oil in the world, has been squeezed in Europe over the past year as rival producers have sent more oil to the region.

Rising shipments from Iraqi Kurdistan that are delivered into the Mediterranean via the Turkish port of Ceyhan have displaced some Saudi shipments this year, traders and analysts said, while more crude from west Africa is also flowing to Europe.

Saudi Arabia has responded by trying to find new customers, including targeting refineries that have traditionally taken the majority of their supplies from Russia and the North Sea.

The global oil market remains oversupplied by at least 1m barrels a day, a move exacerbated by both Saudi Arabia and Iraq raising production since Opec decided last year to focus on squeezing out higher cost producers rather than defending price.

The Saudi Oil Price War Is Backfiring

August 7, 2015

The Saudi Oil Price War Is Backfiring

Saudi Arabia has long enjoyed the status of being the top crude oil exporter in the world. With record production of 10.564 million barrels per day in June 2015, Saudi Arabia has been one of the major driving forces behind the current oil price slump.

The Saudis have kept their production levels high since last year in order to drive other players (especially U.S. shale drillers) out of business. Equally clear is the fact that this strategy of maintaining the glut and driving out rivals hasn’t worked so far.

Even when we look at the refining sector, we see that the oil kingdom has been following a similar strategy of flooding the markets with refined fuel. The Saudis have already sparked an oil price war with the Asian refiners downstream by offering close to 2.8 million barrels of low sulfur diesel to the European and Asian markets. This has caused Asian refining margins to fall drastically, the effects of which can ironically now be seen on Saudi Arabia itself.

Saudis are now reducing their crude oil price hikes in Asia in order to save their market share

As the refining margins have fallen in Asia, refiners there have been compelled to cut their refining outputs. This could eventually result in refiners cutting their crude oil imports.

Asia has been one of the biggest cash cows for Saudi Arabia and there have already been some cuts in some of the most crucial markets. India, which was earlier importing most of its crude oil from Saudi Arabia, is now changing its strategy and buying more crude oil from Nigeria, Iraq, Mexico and Venezuela.

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OPEC Struggling To Keep Up The Pace In Oil Price War

May 21, 2015

OPEC Struggling To Keep Up The Pace In Oil Price War

Some market watchers, such as Cornerstone Analytics (CA), have consistently stated that the underestimation of demand, coupled with over-estimation of supply, will mask the growing call on OPEC oil in the second half of this year. CA recently noted that global demand outstripped supply by some 4 million barrels in April . This comes in addition to the mounting evidence that the oil market, via rig count declines, slowing production growth, higher demand and huge API crude inventory declines, is starting to readjust.

Be that as it may, Goldman Sachs (GS) seems to believe oil must fall to $45 by October (like it previously thought $30 oil was a certainty) to clear the market and rebalance, despite signs that a readjustment is already underway. When was the last time fundaments got ignored and prices went in opposite direction? As an aside, take a look at the S&P 500 vs. GDP growth, as one makes new highs while the other falls from 3.0 percent growth to under 1 percent so far this year!

In other words, asset prices continue to be set by central bankers, and not free markets, so the GS call does make sense if you believe fundamentals don’t matter at all. Still, they should be discussed either way. Rather than being based on the fundamentals, GS, like others, have consistently been off the mark when it comes to oil prices, but refuse to acknowledge it (the agenda at GS has been exposed via Zerohedge). Multiple calls just this week for $45, on top of other economic research, clearly reveal this.

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This May Just Be The Start Of The Oil Price War Says IEA

May 17, 2015

This May Just Be The Start Of The Oil Price War Says IEA

Saudi Oil Minister Ali al-Naimi may be one of the most powerful individuals in the global oil industry. After all, as the top oil official in arguably the world’s most influential oil-producing country, he has enormous influence.

But for all his power, is he the most ingenious? That question arises from the release of two reports on the current state of the oil industry that look at whether or not OPEC’s strategy of forcing US shale to cut back is succeeding.

The first, issued on May 12 by OPEC, says, in essence, that Saudi Arabia’s effort to keep its own oil production at near-record highs is succeeding in wresting market share back from US producers of shale oil, also called “light, tight oil” (LTO). The second, issued a day later by the International Energy Agency (IEA), agrees, but only up to a point.

“In the supposed standoff between OPEC and U.S. light tight oil (LTO), LTO appears to have blinked,” the IEA reported. “Following months of cost cutting and a 60 percent plunge in the U.S. rig count, the relentless rise in U.S. supply seems to be finally abating.”

But the report from the Paris-based IEA, which advises 29 industrialized countries on energy policy, also pointed to a rebound in oil prices that could benefit US shale producers.

As both the OPEC and IEA reports point out, the decline in US shale oil output has somewhat reduced the oil glut and led oil prices to rally up to about $65 per barrel. And the IEA adds that this brings LTO back above the threshold where its production becomes profitable again.

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Who Is Behind The Oil War, And How Low Will The Price Of Crude Go In 2015?

January 1, 2015

Who Is Behind The Oil War, And How Low Will The Price Of Crude Go In 2015?.

Who is to blame for the staggering collapse of the price of oil? Is it the Saudis? Is it the United States? Are Saudi Arabia and the U.S. government working together to hurt Russia? And if this oil war continues, how far will the price of oil end up falling in 2015? As you will see below, some analysts believe that it could ultimately go below 20 dollars a barrel. If we see anything even close to that, the U.S. economy could lose millions of good paying jobs, billions of dollars of energy bonds could default and we could see trillions of dollars of derivatives related to the energy industry implode. The global financial system is already extremely vulnerable, and purposely causing the price of oil to crash is one of the most deflationary things that you could possibly do. Whoever is behind this oil war is playing with fire, and by the end of this coming year the entire planet could be dealing with the consequences.

Ever since the price of oil started falling, people have been pointing fingers at the Saudis. And without a doubt, the Saudis have manipulated the price of oil before in order to achieve geopolitical goals. The following is an excerpt from a recent article by Andrew Topf…

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Canadian Oil Surge to U.S. Gulf Puts Mexico on Defensive – Bloomberg

December 29, 2014

Canadian Oil Surge to U.S. Gulf Puts Mexico on Defensive – Bloomberg.

A price war is brewing between Canadaand Latin America over who will satisfy U.S. Gulf Coast refiners’ hunger for heavy oil.

The new Seaway Twin pipeline will almost double the amount of heavy Canadian crude coming to Gulf terminals and plants to about 400,000 barrels a day starting in January, according to Calgary-based ARC Financial Corp. The shipments are growing even without the Keystone XL pipeline, which has been delayed for six years because of environmental opposition.

The Canadian supply will square off against crudes from Mexico and Venezuela that have traditionally fed refineries along the Texas and Louisiana coasts. State-owned Petroleos Mexicanos widened its discount for U.S. buyers in December by the most since August 2013. Valero Energy Corp. and Marathon Petroleum Corp., which invested in special equipment to refine heavy crude, stand to gain the most from the Canadian supply.

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“It’s Different This Time?” What Happened To US Oil Drillers During The Last Price War | Zero Hedge

November 26, 2014

“It’s Different This Time?” What Happened To US Oil Drillers During The Last Price War | Zero Hedge.

History may not repeat but it rhymes so loud sometimes that Einstein would be rolling in his repetitively insane grave. As Bloomberg notes, the last time that U.S. oil drillers got caught up in a price war orchestrated by Saudi Arabia, it ended badly for the Americans. “1986 was the big price collapse and the industry did not see it coming,” said Michael Lynch, president of Strategic Energy and Economic Research who has covered the oil sector for 37 years, “it put a lot of them out of business. You just don’t forget it. It’s part of the cultural memory.” Think it can’t happen again? Think again… consider how levered US Shale drillers are and just what Saudi has to gain from keeping their foot on the US neck… In 1986, the U.S. industry collapsed, triggering almost a quarter-century of production declines, and the Saudis regained their leading role in the world’s oil market.

As Bloomberg reports,

In 1986, the Saudis opened the spigot and sparked a four-month, 67 percent plunge that left oil just above $10 a barrel. The U.S. industry collapsed, triggering almost a quarter-century of production declines, and the Saudis regained their leading role in the world’s oil market.

So while no one expects the Saudis to ramp up output now like they did then and U.S. shale oil companies are pledging to keep drilling regardless, the memory of that bust looms large for American industry executives on the eve of OPEC’s meeting tomorrow. As the Saudis gather with officials from the 11 other OPEC nations in Vienna, analysts are split on whether the group will cut output to lift prices or leave production unchanged to fight for market share with shale drillers.

“1986 was the big price collapse and the industry did not see it coming,”said Michael Lynch, president of Strategic Energy and Economic Research in Wakefield, Massachusetts, who has covered the oil sector for 37 years. “It put a lot of them out of business. You just don’t forget it. It’s part of the cultural memory.”

…

“Someone has to blink,” said Sarah Emerson, managing principal of ESAI Energy Inc., a consulting company in Wakefield, Massachusetts. “OPEC is saying ‘Does it really have to be us?’”

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

Oil Plunges As Saudis Dismiss Price War “No Basis In Reality” | Zero Hedge

November 13, 2014

Oil Plunges As Saudis Dismiss Price War “No Basis In Reality” | Zero Hedge.

WTI Crude oil prices tumbled to a $75 handle this morning as Saudi oil minister al-Naimi dismissed claims of a price-war as having “no basis in reality” noting that “Saudi oil policy has remained constant for the past few decades and it has not change today,” suggesting expectations of a supply cut at the looming OPEC meetings are overdone. This comment comes after Qatar said it “may” cut output by 500k barrels/day.

As Bloomberg reports,

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