The Russia/Saudi Impasse has happened before and, well, here we go again. Just six years after the last time they flooded the market to cause oil prices to collapse, the Saudi sheiks are doing it again. And this time, they have help from Russia.
Saudi Arabia announced on Friday that it would dramatically increase its crude production in retaliation for the refusal by Russia to agree to a new round of export reductions under the OPEC+ agreement. OPEC had recommended a new cut of 1.5 million barrels of oil per day (bpd) on Thursday, but Russian Minister Alexander Novak made it clear the next day that Moscow would not agree to bear its share of the cuts.
If this Russia/Saudi impasse lingers, the negative impacts to the U.S. oil and gas business – and to the Texas economy that it strongly supports – will be significant. The last time the Saudis went down this irrational path in mid-2014, the following two years resulted in more than 200 oil and gas companies declaring bankruptcy. Most of those companies went through the Chapter 11 process and came out the other end of it to continue operations. A handful went through liquidations of assets and went out of business entirely. The rest were snapped up by other, financially healthy companies at bargain basement prices.
Should the dispute between Russia and Saudi Arabia become a long-term process, the same kind of industry shaking out process could result, complete with all the idled rigs and big layoffs that would come with it.
But there is a “what if” factor at play here that people should note. It is possible that the events of the last few days amount to high-stakes brinksmanship between two of the world’s three largest oil producing countries. It is possible that Russia, while unhappy at the proposed new export cuts, is not intent upon killing the OPEC+ arrangement entirely. Novak’s commitment on Friday that Russia would remain engaged with OPEC in continuing to monitor market conditions indicates an interest by Moscow of ongoing cooperation.
It is also possible that Saudi Arabia – whose country is currently led by the volatile, 31 year-old Mohammed Bin Salman – announced its proposed production increase as a high-stakes bluff designed to force Moscow back to the negotiating table.
We have to understand that, from Saudi Arabia’s own perspective, its strategy to regain market share from U.S. shale producers by intentionally tanking oil prices in 2014 was a massive failure. As I noted in, “from the time the Saudis embarked on their strategy to reclaim market share in mid-2014 through August, 2017, when they initiated talks with Russia related to the OPEC+ agreement, overall U.S. production actually rose by half a million barrels per day.”
That failed strategy by the Saudis ended up costing the Saudi royal family dearly, as it was forced to tap heavily into its sovereign wealth fund to continue financing the country’s social programs in the face of dramatically lower oil revenues. In the end, they felt forced to enter into the OPEC+ arrangement with Russia and other non-OPEC nations as a means of supporting a higher oil price in order to stop the bleeding.
So, it is possible that this seeming impasse between these two oil behemoths could be resolved in a matter of days, with Moscow agreeing to sign onto a modified OPEC+ proposal. Indeed, some market analysts are already predicting that Russia will quickly come back to the negotiating table.
Regardless, all U.S. companies can do is wait and see what develops and start planning their business around a lower oil price than they had anticipated at the beginning of 2020. Perhaps much lower.
The Russia/Saudi Impasse for consumers, is seemingly the bright spot of coming lower prices at the gasoline pump just in time for Spring Break and perhaps the summer driving season. But that 10-20 cent reduction in the cost of gallon of gas would bring with it many jobs losses and hardships for families across Texas and the rest of the U.S., and much lower state and local tax revenues in oil-producing states.
Bottom line: We all need to keep our fingers crossed that cooler heads Moscow and Riyadh ultimately prevail. We have seen these kinds of irrational acts by these countries in the past, and they never end well for anyone.