Latest news with #OilPriceWar
Gulf Insider
6 days ago
- Business
- Gulf Insider
Is A New Oil Price War Between The West And OPEC About To Break Out?
Saudi Arabia's past oil price wars in 2014–2016 and 2020 backfired, as U.S. shale producers became leaner and more efficient. Riyadh drained hundreds of billions in reserves and faced rising fiscal deficits without achieving its goal of crippling U.S. shale. The low breakeven cost resilience of the U.S. shale sector is not quite the same as it was before. It is highly unlikely that anyone with even a modicum of intelligence has lost money in the past ten years or so by trading against the predictable thinking of those in charge of Saudi Arabia's oil policy. Quite the reverse, in fact, with enormous profits available from the failures of the enormously well-flagged and exceptionally predictable strategy of the 2014-2016 and 2020 Oil Price Wars — launched by the Kingdom with the intention of destroying or disabling the U.S. shale oil sector, as analysed in full in my latest book on the new global oil market order. As OPEC members and their toxic companion in the OPEC+ formation, Russia, mull keeping oil production on the high side of recent historical averages, the key question for the oil markets is — surely they are not going to launch another oil price war using the same strategy as failed twice before? It is apposite here to recall the reasons for the failure of the two previous oil price wars since 2014. The first (2014-2016) was based on Saudi Arabia's belief – shared by many in the oil market at the time, it must be said — that U.S. shale oil producers had a breakeven price point of US$70 per barrel (pb) of for the West Texas Intermediate benchmark. Therefore, the Saudis reasoned, if the price of oil was pushed below that level for long enough — by it and its fellow OPEC members dramatically increasing production while demand in the global market was predicted to remain around the same level for some time — then many of the new U.S. shale oil producers would go bankrupt. Any others would have to cease production at such uneconomic price levels and shelve future investment plans aimed at boosting their production even more. So confident was Saudi Arabia of the success of its strategy that shortly after the onset of the 2014-2016 Oil Price War, senior figures in its government and oil ministry it held a series of private meetings in New York to tell them in detail about the strategy it was to use and how well it would go, as also detailed in full in my latest book. At these meetings, the Saudis revealed that, far from looking to keep prices high – as had also been the usual inclination of OPEC for many years to boost the prosperity of member states – it was willing to tolerate 'much lower' Brent prices 'of between USD80-90 pb for a period of one to two years or even lower prices if necessary'. According to several sources at the New York meeting exclusively spoken to by at the time, the Saudis made it clear that it aside from destroying the then-nascent U.S. shale sector, the Oil Price War also aimed to re-impose a degree of supply discipline on other OPEC members. In terms of the first objective, the initial signs augured well for a Saudi victory. The U.S. oil rig count in January/February 2015 saw its biggest period-on-period fall since 1991, and the gas rig count fell substantially at that time as well. According to industry figures as at the end of the first quarter of 2015, around one third of the 800 oil and gas projects (worth US$500 billion and totalling nearly 60 billion barrels of oil equivalent) scheduled for final investment decisions in that year were unconventional and were subject to possible postponement or cancellation. Over the year as a whole, output from the U.S. shale producers typically fell by by around 50%, forcing them to cut investment to approximately US$60 billion over the year, compared to the US$100 billion or so spent in 2014. Crucially, though, from around that point the U.S. shale sector reorganised into a meaner, leaner, lower-cost production machine that could – at that time – broadly survive and profit at WTI prices above around US$35 pb from above US$70 pb previously. They managed to achieve this mainly through the advancement of technology that enabled them to drill longer laterals, manage the fracking stages closer and maintain the fracks with higher, finer sand to allow for increased recovery for the wells drilled, in conjunction with faster drill times, as industry experts old back then. These operations gained further cost benefits from multi-pad drilling and well spacing theory and practice. During this period, Saudi Arabia had moved from a budget surplus to a then-record high deficit in 2015 of US$98 billion and it had spent at least US$250 billion of its precious foreign exchange reserves over that period that even senior Saudis said was lost forever. Moreover, according to International Energy Agency estimates, OPEC member states collectively at least US$450 billion in revenues during the 2014-2016 Oil Price War. The 2020 Oil Price War – using exactly the same overproduction strategy as before — failed less through the long-term effects of misjudging the effectiveness of the U.S. shale producers and more through the direct political intervention of its then first-term President Domald Trump. Given the potentially disastrous economic and political consequences for the U.S. and its sitting president of sharp and sustained rises in oil – and crucially, gasoline – prices, as also analysed in full in my latest book, Trump began by warning Saudi Arabia repeatedly that the U.S. would not tolerate any sustained threat to its shale oil sector (and, by extension, to its economy and its domestic political landscape) – in speeches and tweets and in the increasingly close-run legislative passage of the 'NOPEC Bill'. He also directly warned Saudi Arabia's King Salman bin Abdulaziz Al Saud that the U.S. might withdraw U.S. military support for the Al Sauds, and by extension to Saudi Arabia, with the additional observation that: 'He [King Salman] would not last in power for two weeks without the backing of the U.S. military.' With no sign by the end of March 2020 that the Saudis were going to cease the war, Trump clearly and specifically told de facto Saudi ruler Crown Prince Mohammed bin Salman over the telephone on 2 April that unless OPEC started cutting oil production – so allowing oil prices to rise above the danger zone for U.S. shale oil producers – that he would be powerless to stop lawmakers from passing legislation to withdraw U.S. troops from the Kingdom, according to a very senior source in the White House exclusively spoken to by a the time. Oil production consequently came back down again, and the 2020 war had ended. As of now, the low breakeven cost resilience of the U.S. shale sector is not quite the same as it was before. The recent Dallas Fed Energy Survey suggests that it is around US$65 pb for new wells drilled, although for existing wells it is significantly lower. It is also true that the lifting cost of oil in Saudi Arabia has also risen since 2014 from around US$1-2 pb, but it is still only about US$3-5 pb now. However, the Kingdom's 2025 fiscal breakeven price per barrel of the Brent crude benchmark is a minimum of US$90.9, according to IMF figures. Consequently, it can no better afford a major, sustained fall in oil prices now than it could in either 2014-2016 or in 2020. With Trump back in the White House, it is also no better off politically either. Indeed, with Republicans majorities in both houses, it is worse positioned to deal with the likely threats and actions that Trump would use against it if it went head-to-head with the U.S. again. Instead, according to a senior energy source who works closely with the U.S. Presidential Administration, Washington believes the Saudis will take a modulated approach to further oil production increases, in tandem with the U.S. 'Oil prices at the lower end of recent historical averages suit the U.S. from an inflationary perspective, as long as they don't go too low, and Washington has made this clear to the Saudis,' he said. In fact, these conversations were part of the dialogue that U.S. officials had with their Saudi counterparts during Trump's visit to Saudi Arabia on 13 May to sign a broad-based economic agreement between the two countries. 'There are longer-term financial and security benefits for the Saudis in taking this softer approach, even if oil is below the number they want for their budget in the shorter-term, and to bridge the gap they will have no problem in borrowing more in the capital markets,' he concluded.
Yahoo
03-06-2025
- Business
- Yahoo
Is A New Oil Price War Between The West And OPEC About To Break Out?
It is highly unlikely that anyone with even a modicum of intelligence has lost money in the past ten years or so by trading against the predictable thinking of those in charge of Saudi Arabia's oil policy. Quite the reverse, in fact, with enormous profits available from the failures of the enormously well-flagged and exceptionally predictable strategy of the 2014-2016 and 2020 Oil Price Wars -- launched by the Kingdom with the intention of destroying or disabling the U.S. shale oil sector, as analysed in full in my latest book on the new global oil market order. As OPEC members and their toxic companion in the OPEC+ formation, Russia, mull keeping oil production on the high side of recent historical averages, the key question for the oil markets is -- surely they are not going to launch another oil price war using the same strategy as failed twice before? It is apposite here to recall the reasons for the failure of the two previous oil price wars since 2014. The first (2014-2016) was based on Saudi Arabia's belief – shared by many in the oil market at the time, it must be said -- that U.S. shale oil producers had a breakeven price point of US$70 per barrel (pb) of for the West Texas Intermediate benchmark. Therefore, the Saudis reasoned, if the price of oil was pushed below that level for long enough -- by it and its fellow OPEC members dramatically increasing production while demand in the global market was predicted to remain around the same level for some time -- then many of the new U.S. shale oil producers would go bankrupt. Any others would have to cease production at such uneconomic price levels and shelve future investment plans aimed at boosting their production even more. So confident was Saudi Arabia of the success of its strategy that shortly after the onset of the 2014-2016 Oil Price War, senior figures in its government and oil ministry it held a series of private meetings in New York to tell them in detail about the strategy it was to use and how well it would go, as also detailed in full in my latest book. At these meetings, the Saudis revealed that, far from looking to keep prices high – as had also been the usual inclination of OPEC for many years to boost the prosperity of member states – it was willing to tolerate 'much lower' Brent prices 'of between USD80-90 pb for a period of one to two years or even lower prices if necessary'. According to several sources at the New York meeting exclusively spoken to by at the time, the Saudis made it clear that it aside from destroying the then-nascent U.S. shale sector, the Oil Price War also aimed to re-impose a degree of supply discipline on other OPEC terms of the first objective, the initial signs augured well for a Saudi victory. The U.S. oil rig count in January/February 2015 saw its biggest period-on-period fall since 1991, and the gas rig count fell substantially at that time as well. According to industry figures as at the end of the first quarter of 2015, around one third of the 800 oil and gas projects (worth US$500 billion and totalling nearly 60 billion barrels of oil equivalent) scheduled for final investment decisions in that year were unconventional and were subject to possible postponement or cancellation. Over the year as a whole, output from the U.S. shale producers typically fell by by around 50%, forcing them to cut investment to approximately US$60 billion over the year, compared to the US$100 billion or so spent in 2014. Crucially, though, from around that point the U.S. shale sector reorganised into a meaner, leaner, lower-cost production machine that could – at that time – broadly survive and profit at WTI prices above around US$35 pb from above US$70 pb previously. They managed to achieve this mainly through the advancement of technology that enabled them to drill longer laterals, manage the fracking stages closer and maintain the fracks with higher, finer sand to allow for increased recovery for the wells drilled, in conjunction with faster drill times, as industry experts old back then. These operations gained further cost benefits from multi-pad drilling and well spacing theory and practice. During this period, Saudi Arabia had moved from a budget surplus to a then-record high deficit in 2015 of US$98 billion and it had spent at least US$250 billion of its precious foreign exchange reserves over that period that even senior Saudis said was lost forever. Moreover, according to International Energy Agency estimates, OPEC member states collectively at least US$450 billion in revenues during the 2014-2016 Oil Price War. The 2020 Oil Price War – using exactly the same overproduction strategy as before -- failed less through the long-term effects of misjudging the effectiveness of the U.S. shale producers and more through the direct political intervention of its then first-term President Domald Trump. Given the potentially disastrous economic and political consequences for the U.S. and its sitting president of sharp and sustained rises in oil – and crucially, gasoline – prices, as also analysed in full in my latest book, Trump began by warning Saudi Arabia repeatedly that the U.S. would not tolerate any sustained threat to its shale oil sector (and, by extension, to its economy and its domestic political landscape) – in speeches and tweets and in the increasingly close-run legislative passage of the 'NOPEC Bill'. He also directly warned Saudi Arabia's King Salman bin Abdulaziz Al Saud that the U.S. might withdraw U.S. military support for the Al Sauds, and by extension to Saudi Arabia, with the additional observation that: 'He [King Salman] would not last in power for two weeks without the backing of the U.S. military.' With no sign by the end of March 2020 that the Saudis were going to cease the war, Trump clearly and specifically told de facto Saudi ruler Crown Prince Mohammed bin Salman over the telephone on 2 April that unless OPEC started cutting oil production – so allowing oil prices to rise above the danger zone for U.S. shale oil producers – that he would be powerless to stop lawmakers from passing legislation to withdraw U.S. troops from the Kingdom, according to a very senior source in the White House exclusively spoken to by a the time. Oil production consequently came back down again, and the 2020 war had ended. As of now, the low breakeven cost resilience of the U.S. shale sector is not quite the same as it was before. The recent Dallas Fed Energy Survey suggests that it is around US$65 pb for new wells drilled, although for existing wells it is significantly lower. It is also true that the lifting cost of oil in Saudi Arabia has also risen since 2014 from around US$1-2 pb, but it is still only about US$3-5 pb now. However, the Kingdom's 2025 fiscal breakeven price per barrel of the Brent crude benchmark is a minimum of US$90.9, according to IMF figures. Consequently, it can no better afford a major, sustained fall in oil prices now than it could in either 2014-2016 or in 2020. With Trump back in the White House, it is also no better off politically either. Indeed, with Republicans majorities in both houses, it is worse positioned to deal with the likely threats and actions that Trump would use against it if it went head-to-head with the U.S. again. Instead, according to a senior energy source who works closely with the U.S. Presidential Administration, Washington believes the Saudis will take a modulated approach to further oil production increases, in tandem with the U.S. 'Oil prices at the lower end of recent historical averages suit the U.S. from an inflationary perspective, as long as they don't go too low, and Washington has made this clear to the Saudis,' he said. In fact, these conversations were part of the dialogue that U.S. officials had with their Saudi counterparts during Trump's visit to Saudi Arabia on 13 May to sign a broad-based economic agreement between the two countries. 'There are longer-term financial and security benefits for the Saudis in taking this softer approach, even if oil is below the number they want for their budget in the shorter-term, and to bridge the gap they will have no problem in borrowing more in the capital markets,' he concluded. By Simon Watkins for More Top Reads From this article on Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
Gulf Insider
18-03-2025
- Business
- Gulf Insider
Why OPEC+ Is Supporting A Potentially Disastrous Rise In Oil Production
Oil prices have fallen fast since the 3 March announcement from OPEC+ that it will go ahead with a planned rise in its collective oil production. The prospect of increased supply from the group has added to the bearish tone created by rising supply from other key producers and from uncertain demand projections from the world's biggest importer of oil, China. Lower oil and gas prices is precisely what Donald Trump wants to see in his second term as U.S. president, but with budget breakeven oil prices much higher than even current levels, many may wonder why OPEC+ members are supporting such a potentially financially disastrous production rise. So economically vital is it to most OPEC+ members that oil prices are kept at the higher end of recent historical levels that the organization has not increased production since 2022. In fact, at that point it had begun a series of collective oil production cuts to support oil prices, totaling around 5.85 million barrels per day (bpd), or around 5.7% of global supply. As recently as December, the cartel extended its previous round of 2.2 million bpd in output reductions to the end of this quarter. Industry estimates are that the first phase of the removal of these production cuts will total about 138,000 bpd in April, with much more to come. 'Part of this move [OPEC+ oil production increases] results from repeated overproduction from some of its members, most recently from Kazakhstan [following the Tengiz expansion project], Iraq, and Russia, although Moscow has been doing a lot of it as dark inventory [unofficial output] to sidestep sanctions,' a senior source in the European Union's (E.U.) energy security complex exclusively told last week. 'Another part comes from the group wanting to protect its market share, given the major shift in the supply-demand balance that's unfolding,' he added. 'And the final part of it is the fact that OPEC+ doesn't think it can win an oil price war against the U.S. with Trump in his second presidency, given how badly it did in the last two [oil price wars],' he concluded. Indeed, over the course of the 2014-2016 Oil Price War, de facto OPEC leader Saudi Arabia spend over 34% of its precious US$737 billion foreign exchange reserves and swung from a budget surplus to a then-record high deficit of US$98 billion, as analyzed in full in my latest book on the new global oil market order. So bad was Saudi Arabia's economic and political situation back towards the end of the Second Oil Price War in 2016 (the first being the 1973-1974 Oil Crisis) that the country's deputy economic minister, Mohamed Al Tuwaijri, stated in an unprecedentedly unequivocal way for a senior Saudi in October 2016 that: 'If we [Saudi Arabia] don't take any reform measures, and if the global economy stays the same, then we're doomed to bankruptcy in three to four years.' Although the 2014-2016 Oil Price War had been launched by Saudi Arabia with the intention of destroying or significantly disabling the U.S.'s then-nascent shale oil industry, it only succeeded in destroying the finances of OPEC's members and undermining the reputation of the group – and Saudi Arabia — in the global oil market. Aside from the damage to its own economy, Saudi Arabia had cost the OPEC member states collectively at least US$450 billion in revenues during the 2014-2016 Oil Price War, according to International Energy Agency (IEA) estimates. So badly had OPEC and its effective leader Saudi Arabia been hit by their own actions that Donald Trump was able to exploit this weakness to maintain a tight oil price range during his first term as president through the occasional incentive but many more threats. The lower part of the 'Trum Oil Price Range' is US$40-45 per barrel of the Brent benchmark, which is the price at which the bulk of U.S. shale oil producers can breakeven and make a good profit on top. The upper part of it is US$75-80 per barrel, which ties into historical data showing that a gasoline price of under US$2 per gallon has been most advantageous for U.S. economic growth. This US$2 per gallon level has historically equated to a West Texas Intermediate (WTI) oil price of around US$70 per barrel. And as WTI has also historically traded at a discount of between US$5-10 per barrel to the Brent oil benchmark, this US$70 per barrel of WTI price equates to around US$75-80 per barrel of Brent. Judging from Trump's comments on the campaign trail and in his 'Agenda47' blueprint for a second term, his view that oil prices should continue to be heavily influenced by the U.S. in such a way has not changed. He will also be aware of the dramatic political consequences for U.S. presidents of oil prices rising beyond the top of the Range, as also fully detailed in my latest book on the new global oil market order. Specifically, since 1896 the sitting U.S. president has won re-election 11 times out of 11 if the economy was not in recession within two years of an upcoming election. However, sitting U.S. presidents who went into a re-election campaign with the economy in recession won only one time out of seven. Adding to their troubles in this regard, the Saudis know that Trump has much greater power in this term than he did in his first, with Republican majorities in the Senate and the House of Representatives, and his nominees dominating the Supreme Court. They also know his attitude to OPEC and the Russia-enhanced OPEC+ groups, which was marked early in his first term. More specifically, when Saudi Arabia was still trying desperately to repair the appalling damage its 2014-2016 Oil Price War had done to its own finances and to those of its OPEC brothers, it embarked on coordinated production cuts (with Russia as the new-found member of the expanded 'OPEC+' cartel) to push the oil price higher. Trump's reaction was quick and unequivocal: 'OPEC and OPEC nations are, as usual, ripping off the rest of the world, and I don't like it. Nobody should like it,' he said. He added: 'We defend many of these nations for nothing, and then they take advantage of us by giving us high oil prices. Not good. We want them to stop raising prices. We want them to start lowering prices and they must contribute substantially to military protection from now on.' Following Trump's clear warnings to Saudi Arabia's Royal Family in the third quarter of 2018 of the catastrophic consequences if the Kingdom continued to keep oil prices higher than the US$80 per barrel Brent price ceiling – analysed in full in my latest book on the new global oil market order — Saudi Arabia was instrumental in keeping oil prices lower by orchestrating coordinated OPEC production increases. That brief period was the only part of Trump's presidency that saw his Oil Price Trading Range breached to the upside. This no-nonsense approach from Trump was a function of a broader shift in U.S. policy towards Saudi Arabia following its 2014-2016 Oil Price War that continues to this day and of which the Saudis are fully aware. Before that War, the foundation relationship agreement between Saudi Arabia and the U.S. was the deal that had been struck on 14 February 1945 between the then-U.S. President, Franklin D. Roosevelt, and the then-Saudi King, Abdulaziz bin Abdul Rahman Al Saud. This deal was simply that the U.S. would receive all the oil supplies it needed for as long as Saudi Arabia had oil in place and, in return for this, that the U.S. would guarantee the security both of Saudi Arabia and its ruling House of Saud. The implication of this – and clearly delineated at the time of the 1945 agreement by the U.S. side – was that the oil Saudi Arabia supplied to the U.S. would be at a reasonable price based on previous historical levels. However, after the end of the Oil Price War in 2016, a hugely significant change occurred in the U.S.-Saudi Arabia agreement. It effectively changed to one in which the U.S. would receive all the oil supplies it needed for as long as Saudi Arabia has oil in place and in return would guarantee the security of Saudi Arabia and the ruling House of Saud, but it included the proviso that Saudi Arabia did not jeopardise the economic well-being of the U.S. Click here to read more…
