Two months ago, Russia said no to Saudi Arabia’s proposal for deeper oil production cuts. It was enough to start a price war that, coinciding with the Covid-19 pandemic, wiped out billions in oil revenues for both Russia and Saudi Arabia while forcing them to enact even deeper cuts than previously discussed.
Some say the price war was never about Saudi Arabia and Russia. They say it was about U.S. shale. If that is accurate, what happens when the U.S. shale patch regains enough strength to start ramping up production again?
It might sound premature to talk about production ramp-ups with West Texas Intermediate still below $40 a barrel and likely to stay below this crucial mark for a while. But eventually, prices will hit the mark: shale producers have cut a solid chink of their output, demand is improving, and not least, bankruptcies are already underway with more to come. In fact, as many as 250 U.S. shale companies could go under, according to Rystad Energy, unless prices improve markedly and quickly.
Gulf-focused business journalist Frank Kane wrote for the Arab News that the next price war is just a few dollars per barrel away. These few dollars would motivate producers to start increasing their production.
“It would make no sense at all for Saudi Arabia to continue with its market-changing cuts, which are exacting a big price in terms of lost revenue, if the U.S. was swamping the world with oil again,” Kane wrote, adding that, “The battle for market share — with the Kingdom turning the pumps full throttle again — would be back on.” Related: Will U.S. Shale Survive If Oil Hits $40?
Saudi Arabia recorded a budget deficit of $9 billion for the first quarter of the year, with revenues down 22 percent during the period on the back of the oil price slump. Aramco’s profit for the quarter fell by 25 percent. The Kingdom started issuing bonds on the international market to stabilize its finances as it bled foreign reserves at the fastest rate in 20 years, according to Reuters, as it fought the double blow of low oil prices, weak demand, and the Covid-19 pandemic.
Meanwhile, Russia reported a budget surplus for the first quarter, albeit a modest one, at 0.5 percent. It maintained the surplus in April as well, but now it seems that the pandemic has started to take a toll, with Finance Minister Anton Siluanov telling local media that the government planned to increase borrowing and delay some national-scale projects until the economy recovers. The minister forecast a 5-percent GDP decline for the year thanks to oil price developments and the pandemic.
Economically speaking, the immediate outlook for the U.S. economy is grimmer than that for Saudi Arabia or Russia, with the second-quarter GDP seen by some as posting a double-digit decline, and a hefty one at that, at up to 40 percent. The U.S. oil industry is not such a big part of the United States’ GDP as it is for Russia or Saudi Arabia, but unlike Russia or Saudi Arabia, the U.S. oil industry can hardly rely on government aid. In fact, the American Petroleum Institute has spoken…