The oil Narrative is not as it seems. We think there will be a superficial deal between Russia and t
Frenemies
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This commentary is being provided to you as general information only and should not be taken as investment advice. The opinions expressed in these materials represent the personal views of the author(s). It is not investment research or a research recommendation, as it does not constitute substantive research or analysis. Any action that you take as a result of information contained in this document is ultimately your responsibility. Epsilon Theory will not accept liability for any loss or damage, including without limitation to any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Consult your investment advisor before making any investment decisions. It must be noted, that no one can accurately predict the future of the market with certainty or guarantee future investment performance. Past performance is not a guarantee of future results. Statements in this communication are forward-looking statements. The forward-looking statements and other views expressed herein are as of the date of this publication. Actual future results or occurrences may differ significantly from those anticipated in any forward-looking statements, and there is no guarantee that any predictions will come to pass. The views expressed herein are subject to change at any time, due to numerous market and other factors. Epsilon Theory disclaims any obligation to update publicly or revise any forward-looking statements or views expressed herein. This information is neither an offer to sell nor a solicitation of any offer to buy any securities. This commentary has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. Epsilon Theory recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial advisor. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.
Once US E&P is crushed, is the next step the end of the petrodollar arrangement synchronized with Russia replacing the US as the bodyguards of the Saudi royal family? Then Iran has to hook up with China. US-Israel is probably pretty durable.
The narrative is not only not what it seems, it’s much ado about nothing. OPEC is a paper tiger that has been at the mercy of market forces for several decades now. Prior to price falling out of bed on March 9, OPEC+ was discussing cuts on the order of 1.5 million barrels per day, hardly sufficient to dent 20-30 million barrels per day of COVID-19 demand destruction. I suspect had they come to agreement price would have done something similar and the headline would have read ‘OPEC cuts not enough’.
Shale oil has been one of myriad malinvestments of this Fed easing cycle. (As cartels go, the central banking one has been much more effective). US shale producers have sported significant negative net cash flow in aggregate over the past decade, yet seemingly are always able to get access to credit to keep increasing production. US production has grown by 4 million barrels per day the past 3 years while Saudi and Russian production has been relatively flat. It’s not that Saudi and Russia don’t want to hurt US shale producers, it’s that US shale producers have already severely impaired Saudi and Russian finances (and their own in the process). But, man, can you think of two characters whose cartoons make better villains?
I agree there is a long game being played. Unfortunately for Russia and Saudi bankrupting the US E&P companies does not solve their problem! It is not like the oil in the ground disappears. The point being once oil prices rebound - if that is part of their game - the assets will be dusted off, risk takers, both equity and debt markets with short term memories will be all to happy to fund the dusting off wells and ramping up production again! Is this really just a supply and demand issue - and the games just a merry-go-round, lots of spinning but going no where?
With the Whiting Petroleum BK, the assets didn’t even need to be dusted off: debt holders get the new equity, old equity owners get nothing, and the new company continues producing, uninterrupted.
“We suggest the oil price war is between OPEC+ and the U.S.” Precisely. I’m in the RR business and frac sad shipments to Texas are waaaay down. I’m hearing breakeven at $50 and many low-end producers are north of $60. The Saudis and Russians have to agree that profitable or subsidized producers in the US eat into their share of the world market. Frenemies is about right. Thanks.
CBC (Central Banking Cartel) has a nice ring to it. Temporarily displaced by the CDC in this forum perhaps, but the spotlight will be theirs again. CDC might even help by encouraging a cashless economy for health reasons.
E&P boom and bust is a 100 year plus Do Loop. Nothing new but the face of the stressor. Underlying cause same as always.
If i’m not mistaken this is the second time around the merry-go-round for them!
We are clearly of the same mind here. The one aspect I did not bake into my piece was U.S. reticence to do anything game changing in retaliation for the Iranian attack on the Aramco facility. That attack was really against the U.S., and our lack of a more visible and impactful response must have maddened the Saudis. (https://www.reuters.com/article/us-saudi-aramco-attacks-iran-special-rep/special-reporttime-to-take-out-our-swords-inside-irans-plot-to-attack-saudi-arabia-idUSKBN1XZ16H). Yes, there were reports about a cyber attack on Iran in retaliation, but who cares. Nobody cared about Soleimani either. It failed to make a point to the world that we had the Saudi’s back.
My main points were twofold. First, whether the narrative of Saudi-Russia price war or Saudi-Russia collusion to destroy US shale is closer to the truth is meaningless. OPEC+ has little or no influence on price in the face of 20-30 million barrels per day of demand destruction. Second, the primary source of oversupply in the market is US shale due to malinvestment encouraged by Fed policy. The Saudi-Russia cartoon villains make for perfect scapegoats rather than US producers and policy makers looking in the mirror (especially if the narrative of foreign meddling can be advanced in service of receiving federal assistance).