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2020.04.05 Penn Wealth Report Vol 8 Issue 02

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05 apr 2020 penn wealth Report volume 8 issue 02 11 Penn Wealth Report Copyright 2020. All Rights Reserved. tactical Awareness Energy Commodities Saudi vs Russia vs US Shale: e New Oil Wars When Russia wouldn't play ball with OPEC, Saudi Arabia declared a price war against Putin; meanwhile, Russia's aim is to drive US shale drillers out of business. Let's be clear from the start: While US shale producers will get hurt by the new oil war being waged between Saudi Arabia and Russia, America has only one true adversary in the fight, and that is not the Saudis. While it is true that, back in 2016, then-Saudi Oil Minister Ali al-Naimi tried to strangle the new US energy renaissance by refusing to cut production, that move ended with US firms improving their efficiency, oil falling 50%, and the oil minister getting canned. is time around, the pain for US exploration and production (E&P) companies will be greater, but let's lay blame where it belongs. In the second week of March, as COVID-19 fears were hit- ting their stride and US markets were faltering, the second shoe dropped: Saudi Arabia announced that it would increase pro- duction at Saudi Aramco to 12.3 million barrels per day (bpd), causing oil prices to plunge 27% almost immediately. (WTI closed the previous week's trading at $41.60/barrel; by Monday's close it was sitting at $30.24/barrel.)at move exacerbated the downward spiral in US stocks, with the major indexes falling nearly 8% on Monday. Of course, that was nothing compared to the drop in the share prices of major E&P companies. What caused the fracture between the two sides? It all began, as do many things, with Putin's ego. is time around, however, the mercurial ruler of Russia is dealing with a new leader of Saudi Arabia in the midst of consolidating his own power, and outward displays of strength are very much welcome in his playbook. At first, the relationship between Crown Prince Mohammed bin Salmon (MBS) and Putin seemed a bit too cozy, which gave us concern. After a high-profile trip by the latter to Riyadh just prior to the IPO of Saudi Aramco, OPEC teamed up with Russia (in a cabal known as "OPEC+") to limit oil production in an effort to keep prices high. at arrangement began to fracture in early 2020, as Russia faced an ever-increasing need for oil rev- enues to grow its military and feed its population. A full 60% of Russia's exports are energy-based, and 30% of the country's GDP comes from oil and gas revenue. By February, the fracture was becoming a canyon. A typical tactic of Putin's is to keep world leaders waiting or to relay the message that he is "too busy to talk." When he did this to MBS's father, King Salman, it didn't sit well with the up-and-coming ruler. Any goodwill Putin built up was essentially dead. e Vienna meeting. anks to the global slowdown, especially the dramatic eco- nomic trough in China due to the coronavirus, oil demand has been falling. Demand was still in contango (future prices higher than spot prices), however, because everyone expected OPEC+ to cut production, yet again, in response. All that was needed, at the Vienna headquarters of OPEC during an early March meet- ing, was Russia Energy Minister Alexander Novak's affirmation that his country would abide by OPEC's new plan. His approval was all but assured. Instead, Novak walked out of the meeting, giving the rest of the OPEC nations his "blessing" to cut all they would like—Russia would continue to pump away. First the slight to his father, and now this? Why the main- stream media seems befuddled by Saudi Arabia's response says more about the analytical abilities of the typical journalist than it does about MBS's temperament. Not only would Saudi Arabia abandon the planned OPEC cuts, it would increase the coun- try's own production to record levels in an effort to make Putin pay dearly for his hubris. Help for US producers. e Wall Street Journal recently published an article quoting a source from the Russian finance ministry proclaiming that "the country could withstand ten years of prices at $25 to $30 a bar- rel." at is an outright lie, pure baloney; and shame on the author of the story for printing it in a matter-of-fact manner. Of the top three leading producers of oil and gas in the world, the United States, Saudi Arabia, and Russia, Putin's country can play this game of chicken for the least amount of time. As for America, there is every indication that the Trump administration will take steps to assist the industry during what is sure to be a time of contraction, acquisition, and—for some—a shuttering of operations. Crude futures spiked over 40% after the president announced that he had talked with both MBS of Saudi Arabia and Putin of Russia, and that an agreement for a ten million bpd cut was on the drawing board. at would be an incredible win, but we suspect the two OPEC+ nations won't follow through unless the US cuts as well. at will be a hard sell, but energy CEOs may have little choice in the matter. We don't see the administration letting the critical shale industry be hobbled, even if that means granting zero-interest government loans to companies struggling to refinance in the private market. In the meantime, enjoy the cheap gas prices.

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