Thread by @davidfickling

What Saudi Arabia is trying to do with the oil market, at a time when coronavirus is crippling crude demand, is weirdly like what your body tries to do with a fever. #OOTT

A fever is an act of self-harm: Raise the temperature of your body to the edge of biological survivability with the intention of killing off the infection spreading through your cells before you yourself succumb.

That's what's going on here: Saudi is flooding the market with supply, hoping that low prices will kill off its rivals first and force them to cut production, leaving it with an enhanced position in a tighter oil market.

This strategy worked spectacularly well in 1985. After years of supporting prices by restraining its own output and watching as the USSR took more and more market share, Riyadh flooded the market.

The policy ultimately led to the fall of the USSR:
bloomberg.com/opinion/articl…

The problem with the fever strategy is it only works if you're stronger than the infection you're fighting. If you do it wrong, you end up killing yourself.

And this time around, Saudi in many ways is weaker than Russia and even the U.S.

U.S. shale producers will almost certainly be first to cut production, but they can return quickly as soon as prices go above their breakeven levels around $45/barrel.

That makes them more flexible than their larger rivals, which depend on wells that break even over a decade or so.

The more dangerous enemy for Saudi is Russia, which can balance its budget at $42/barrel -- about half the price Saudi needs.

As sovereigns, both Russia and Saudi can borrow very cheaply right now -- which is useful, as they look like they're preparing for a long period of going into budget deficits on every barrel they pump.

That means that credit markets, rather than commodity markets, will ultimately decide who wins this war.

Read the whole column here:
bloomberg.com/amp/opinion/ar…