Putin: You better believe the oil-production war with Saudis is still on

Putin: You better believe the oil-production war with Saudis is still on

“The hard part about playing chicken,” Bart Mancuso tells Jack Ryan in The Hunt for Red October, “is knowing when to flinch.” Neither Saudi Arabia nor Russia appear ready to flinch, let alone swerve, in their showdown over oil production that has cratered the global markets. The Saudis are threatening to keep the spigots flowing and push oil prices even lower, and Bloomberg reports that Vladimir Putin feels he can’t afford to look as though he got pushed around.

Will oil go below $20 a barrel? And what will that do to the US economy? Putin has bigger worries than that, Annmarie Holdern notes, but he might look to the US to either resolve the standoff or to take market action to bolster prices (via Peter Grandich):

Russian President Vladimir Putin will refuse to submit to what the Kremlin sees as oil blackmail from Saudi Arabia, signaling the price war that’s roiling global energy markets will continue.

The unprecedented clash between the two giant exporters — and former OPEC+ allies — threatens to push the price of a barrel below $20, but Moscow won’t be the first to blink and seek a truce, said people familiar with the government’s position.

Putin’s government has spent years building reserves for this kind of crisis. While Russia didn’t expect the Saudis to trigger a price war, the people said, the Kremlin so far is confident that it can hold out longer than Riyadh.

Bloomberg points out that Russia’s economic structure rests on an assumption that oil will sell at $40 a barrel or more. They have reserves thanks to some fat years on energy prices, but they won’t last long if this price war continues indefinitely. Oil and gas are the mainstays of the Russian economy, and a recession could very well undermine Putin’s political standing as the first occasionally elected tsar in Russian history. The Saudis have a much more dictatorial regime to control public sentiment, and they have been diversifying their economy over the last several years to prevent price shocks from having too much of an impact. In a game of chicken between the two, bet on the Saudis.

The US is less beholden to oil production, but that’s not to say that it won’t impact us at all. We became a net exporter over the last few years thanks to lots of investment in oil production, especially fracking, that assumes a much higher floor than $20 a barrel, or even $40 a barrel. A price-production war among OPEC members will eventually hammer our domestic production capability by pushing investors out of the market. That is why Putin’s looking to the US, either to mediate the dispute or to provide some short-term price support.

Not coincidentally, Treasury Secretary Steve Mnuchin has announced large oil purchases to bolster the national strategic petroleum reserve. It’s part of the strategy to prop up the economy in the coronavirus crisis:

Treasury Secretary Steven Mnuchin on Thursday backed a plan to spend as much as $20 billion to buy crude oil to prop up U.S. oil companies and fill the nation’s Strategic Petroleum Reserve.

But filling the emergency storage caverns would cost only about $1.85 billion, a fraction of what the Treasury secretary estimated.

The Strategic Petroleum Reserve, held in salt caverns in four locations near the Gulf of Mexico, can store as much as 727 million barrels. The Energy Department said filling it would require the purchase of 77 million barrels. At today’s price of roughly $24 a barrel, that works out to $1.85 billion.

The purchases would help U.S. firms indirectly by driving up oil prices, if only modestly. Scott Sheffield, chief executive of Pioneer Natural Resources, said in an email last week that buying crude for the reserve “is a short-term fix. Keeps oil from going into the $20s for a few weeks.”

Twenty billion dollars is a drop in the bucket, but the overbuy is probably intended as a signal to the Saudis that enough is enough. We like oil prices on the low side, and consumers loooove it at the gas pumps, but prices have to be high enough to keep producers in the game, too. And with everything else in flux at the moment, this might not be a great time to destabilize energy production.

Trending on HotAir Video