For all my non-oil peeps, an update:
A few days ago, the big OPEC/Russia meeting ended without a deal to cut production. Now Russia and Saudi, the two biggest exporters, are saying they’re going to maximize production and flood the market.
So why does this matter?
A few days ago, the big OPEC/Russia meeting ended without a deal to cut production. Now Russia and Saudi, the two biggest exporters, are saying they’re going to maximize production and flood the market.
So why does this matter?
This move is a response to years of frustration: as OPEC/Russia have cut, they’ve lost market share to US shale, which has won a big piece of the market and turned the US into a major exporter for the first time in decades.
Saudi had led the charge to cut production. But this time, Russia wasn’t having it. And now the Saudis have announced big discounts on their crude, particularly the stuff they sell to the US. It’s essentially a declaration of war on US producers. Expect gas prices to plummet
US shale has changed the whole global oil picture. But companies are drowning in debt. The squeeze started late last year, as Wall Street started pressing firms to tighten up and impose some fiscal discipline. Folks expected in 2020 to see the pace of growth in the US patch slow.
But what we might see now is a bloodbath. Gas prices have been floating between $50-60 all year. Most companies can turn a profit at that level. But now prices are in the $40s, with the Saudi surge likely to send them into the $30s. The impact will be massive.
Uncertainty on the market, declining demand, high competition and low profitability is going to hit the domestic US industry hard. It wont kill it entirely, but it will certainly depress investment.
Economically, this could get very bad for Texas and North Dakota, where the oil and gas industry carries a lot of weight. Most companies are hedged, so even sweeping bankruptcies or defaults might not produce economic impacts—a shale bubble might not impact the broader US economy
Low gas prices are usually a plus. But for Trump, this could take the wind out of the whole “energy dominance” thing. The broader economic impact might be worse than some expect.
But what this really shows is the Russian determination to win back some territory on the global oil market—and their willingness to do this, however it might impact the US economy. And Saudi followed suit almost immediately
It’s a price war—what happens in global oil when cooperation breaks down and competition becomes cut-throat.
