The Saudis Have a High-Stakes Plan to Win the Global Oil War
bloomberg.comI don't get it.
It is estimated that below 50$/barrel Saudi Arabia is basically pushing wealth out of their country. (Balance of payment in negative, it is right?.)
And below 80$/barrel they are running the country at a deficit.
They are now selling to 30$/barrel.
What is the strategy here? Push all "high-tech" producers out of the market and shut up the price again? How long can they last? And how much it will cost?
FWIW, I don't like the statement "KSA needs 80USD per barrel to break even". It's too blunt, and obscures lots of variables, including their bond market, their megaprojects that aren't really being paid for (yet) as they haven't started at full scale, fluctuations of external work forces, the operations in Yemen, etc etc ... were these parameters included or not? Were they compensated for in any way? I don't know the answer to those questions, although a lot of people must do. In any case, those parameters have undisputably changed since this claim was first made. And I really doubt "the Saudis" (... all 30 million of them ...) would agree to the 80USD per barrel figure.
Also, it most probably means that AT CURRENT PRODUCTION VOLUMES, ie. artificially low, they would need x USD per barrels. With more production, whatever that figure was, it will now be lower.
what kind of mega projects are they involved in outside oil? I learned that they invested 40B in the SoftBank fund. Is this what you're referring to? Where would I look or what should I read to learn more about this? thanks
Dunno about good sources, but Neom and Qiddiya AFAIK still have prospected budgets of 500 billion dollars, each. This is of course an approximation and the actual amount is in a state of flux, so these are just two mega-parameters that are obscured by the x-dollars-or-bust statement that I hear so often.
They're building a bunch of new cities:
Please note that these projects are not all governmentally funded and thus do not burden the state budget (affecting the x-usd-per-barrel-or-bust number) per se - Jeddah Tower is built "privately" by prince Waleed and his company if I'm not mistaken.
But, the list does match the OP title "The Saudis ..." ... hehe ...
It was my understanding there isn't much difference between the prince and the company and the country. Is that inaccurate?
If the state owned oil companies pay a lot to the royal family, that's kind of like you owning the company and setting your own salary to whatever you want. There's a difference on paper, but not in spirit (to me anyway).
Just as an example, Prince Waleeds fortune is more or less self made. Furthermore, his company "Kingdom Holding" (IIRC) is to my knowledge not owned by the government (but it's a public company so that big investment fund - is it called the PIF? - could theoretically buy KH stock.)
Some of those real estate projects look private to me.
thanks for this
Ok, 80USD is only approximate. But in the context of a discussion of the government's pricing strategy, that is probably good enough.
Is the figure from before or after the Yemen offensive winded down?
It's a stupid move, because the tech and reserves won't go away. As soon as prices rise again to levels needed by Saudi Arabia the reserves will be exploited again. Probably they hope that banks give less money and hedges to shale companies, but that won't work long-term.
Saudi Arabia may see civil unrest soon as the house of Saud need all the money they can to spend on social welfare to stay in power.
> will be exploited again
There could be investment inertia and reluctance. After all, it's possible that the oil producer companies play the "price war" again.
There's probably never a better chance to crush competitors, now that demand is low and high-cost private wells are fragile.
This is the answer. They think they can send US shale into bankruptcy before they go bankrupt themselves.
But when the cost recovers we'll be back at it again. US shale has seen booms and busts for a hundred years.
Saudi Arabia oil is the cheapest in the world. They have massive oil fields. So in principle they can bankrupt anybody unless somebody can come up with a cheaper way to get oil.
Whipsaw mkts will eventually make it impossible for credit to be extended to allow these low ROIs to operate.
Welcome to post-peak oil pricing dynamics.
Half expecting some form of a bailout for shale producers if it comes to that.
>pushing wealth out of their country. (Balance of payment in negative, it is right?.)
No...if balance of payment is negative, that means they are pushing money out of the country. Presumably there is a corresponding flow of goods inward, so the "wealth" does not change as such.
The imported goods may of course be consumed (e.g. Swiss chocolate, movies), or put to productive use (e.g. a lathe, education), or just stored (e.g. gold).
Bankrupt the fracking companies in America and deprive Russia of money so they can’t effectuate greater sphere of influence in the Middle East through Syria/Iran.
It’s a temporary measure for sure but obviously they felt it necessary,
> Bankrupt the fracking companies in America
So are they fighting a war with North Dakota?
Overall this is good for the US and the frackers equipment is still there, if price goes up they will come back, as they have done before.
> Russia of money so they can’t effectuate greater sphere of influence in the Middle East through Syria/Iran
Why are you referencing Iran? Iran and Russia while not enemies are hardly friends.
More Texas/New Mexico than North Dakota. And the US doesn't have to stand idly by while their frackers die on the vine.
Yup. Time for tariffs.
Why would the US want to turn victory into defeat?
Actually right now it's around $22. Which is uncomfortably close to the break even for most major Canadian oil extraction. It may even be below cost for some of them since the exact numbers are considered competitive secrets. Alberta's economy is built on the oil sands.
The liquidity crunch in the global market can be used to negotiate a better deal for Saudi Arabia. Still, it's hard to know how good it will be without knowing more details.
> Still, it's hard to know how good it will be without knowing more details.
Yeah, for all we know they could have loaded up on CDS on O&G plays and stand to offset any losses just by triggering default clauses on the frackers.
Is the CDS market big enough to do that? It's big, but the oil market is massive.
Hard for me to say, a lot stuff is traded over the counter, and one can get short exposure alot of different ways. Blackrock[0] has about $10 trillion notional for the single name cds market in 2016, estimated in 2017 that there was about ~$15,000 million avg daily volume in HY, and ~$26,000 million in IG (cash traded bonds, etfs, and cdx) and that's not considering the notional on the derivatives (swaps/options) on those.
[0] https://www.sec.gov/spotlight/fixed-income-advisory-committe...
By comparison, Saudi Arabia produces 12 million barrels of oil a day: if the price drops $30 they need to make $360 million per day to cover that, or $30 billion if they carried out the trade over a three-month period.
If the total single-name CDS market is $10t and $1t of that is in oil and gas firms...it doesn't seem out of the question you could get a $30b position. Not that I really believe this is what's going on.
> It is estimated that below 50$/barrel Saudi Arabia is basically pushing wealth out of their country. (Balance of payment in negative, it is right?.)
You are assuming that the saudis didn't hedge. Being the "first mover" in this case, they would have had ample time to hedge against any drop in oil prices. Of course when they decide to cut supply and increase oil prices, they could bet on oil futures and make a lot of money beyond the selling of oil itself.
> What is the strategy here? Push all "high-tech" producers out of the market and shut up the price again? How long can they last? And how much it will cost?
Putting frackers out of business is that same old nonsense financial "news" has pushed the last 10 years. If someone at bloomberg actually knew what they were talking about, especially about the saudis and their oil plans, they wouldn't be slaving away at bloomberg. They would trade oil/commodities and retire in a day. A journalist at bloomberg knows about as much about the saudis plans as a journalist at espn knew about brady's plan during free agency. They know nothing. All they do is spew conjecture for clicks.
Oil is a geopolitical tool. It's an election year. Low gas prices make voters happy. Someone likes the saudis and the saudis like that someone. Also, low oil prices hurt venezuela and iran more than anyone else and will cause the suffering of many people. 2+2=5. Your guess is good as any from bloomberg.
You're the only person who brought the correct reason for the situation, Saudis are cow milk for Trump and the absolute silence of Trump is clear answer of his satisfaction on the situation.
Killing fracking industry is really stupid to even think of.
Saudi Arabia has shifted away from thinking like manufacturers to thinking like investors. Oil doesn’t matter to them - it does now, but it doesn’t psychologically. Wealth is what matters.
Oil is still their golden goose - their special “10x” or “unicorn” status sauce. If the forecast for long-term global oil demand is losing steam in light of desires to shift away from fossil fuels, then perhaps sooner is the best time to sell those assets to accumulate wealth to save and invest in other areas to grow more wealth (ex. Vision Fund).
IMO - the price war is a short game to fund pivots into different long games - and as we all know, starting out with wealth to fund that is a nice situation to have.
At $30/barrel they’re selling oil at a loss, not building up wealth to invest elsewhere.
No... the Saudi oil production costs are circa US$10/bbl, and their marginal production costs (ie costs to produce one more barrel) are circa US$3.00.
They are not selling at a loss, but they are not making enough to run their country (that would take prices of ca US$80/bbl at the current rate).
>> They are not selling at a loss, but they are not making enough to run their country
So without further measures to run the country differently, that effectively means they are losing money and not 'building wealth', right?
Oil is still profitable, just not enough to run the country.
Imagine it's a bunch of small restaurants. The Saudi place is owned by a large family and is the biggest, leanest place running the highest profit but this Russian crew is edging in with a place across the street. Both sets of owners have deep pockets and can keep their place running for a while. Then the US is the fancy food cart in the parking lot down the road that costs more per plate and has less capacity but is right next to the office buildings so gets the most attention at lunch.
The Saudis are still covering all costs and making money but the owners have other big expenses that are draining their wallets. The drain is faster than what the restaurant can earn but they would be worse off if it shut down for a few months.
The Russians have muscled in and though not as lean are keeping up and still covering costs (though it's a lot harder to see the cash flow, it's sketchy).
Then the food cart is running on really low margins and has no backing, it's an independent place, but it is running profitable thanks to the lunch rush. If it had to shut down it wouldn't be a huge loss each month in fixed costs like rent as the trailer can be stored.
The Saudis and Russians want the food cart to go out of business asap so the lunch customers have to come to them and bump their profits so they have to stay open and but up big lunch deals, even if a virus is going around that slows down the whole industry. Hopefully they can weather the drop in margins until the food cart is no longer making money and gets put in storage (where it will take a while to hire staff and bring back up to speed if it ever makes it back out).
Then, it's an isolated price war between the Saudi and Russian owned places until they recognize a duopoly and mutually leave prices high while still pulling in the lunch crowd as they are the only options or tying to undermine the other but at least the food cart is gone and the office workers are all reliant on them for lunch.
Presumably part or running their country is investing into some projects expected to generate returns in the long run, i.e. building wealth.
I guess their thinking is with the current state of the world they would be selling oil at a loss anyways. So might as well slightly increase that loss and hurt their competitors as well.
MSB has already lost. It is only a matter of time before he gets the Khashoggi treatment.
He personally stole $100 Billion from his extended family and other Saudis.
https://www.nytimes.com/2018/03/11/world/middleeast/saudi-ar...
Saudi Aramco is only $101 Billion or half the "required" market cap of $200 Billion MSB needs to fund Saudi Arabia.
He is a deadman walking but so it Saudi Arabia.
"My grandfather rode a camel, my father rode a camel, I drive a Mercedes, my son drives a Land Rover, his son will drive a Land Rover, but his son will ride a came"
"Aramco, on the prospectus for its 2019 initial public offering, warned that oil demand might peak within 20 years."
From what I read, it's going to be more like ten years from now. That because in a another two or three years, battery prices will be low enough that ev sticker prices will match ice ones, and that plus public policies will lead to ev sales skyrocketing and ice sales plunging.
Saudi Arabia knows the big transition is coming, and is working as fast as it can go get its economy out of oil. I don't see how it is going to be able to do this fast enough to avoid financial disaster.
Driving everyone else bankrupt failed with fracking. Why would it work with Russia?
Nothing needs to work with Russia, it is an excuse. Russia's oil output as % of global production hasn't really changed for decades. It's is all about US frackers, peak oil demand, and a prince's concern about his personal future.
Even then, it failed before because fracking companies could shut down and start back up without too much loss of capital. To me this reeks od trying the same thing again and expecting a different result.
MBS seems to behave quite randomly. Maybe that's logical: being predictable is dangerous. But that's the only explanation that fits here I think: he'll burn 1tn usd because no one would expect that!
Has anyone got a better logic to explain this? Does it suit Saudi to weaken other OPEC members?
Who is that moron that wrote the article? Byzantine art of diplomacy? Saudia Arabia never existed when the Byzantines did! Also the Byzantines weren't known for their diplomacy.
It's like saying the prussians enagaged in Catholic meditative sessions.
If you're not a fluent English language speaker, you might want to look at a dictionary before calling people morons.
In addition to its original definition as "what the Eastern Roman Empire morphed into", it also means: "excessively convoluted" "highly complex, intricate, and devious". These other definitions unsurprisingly are based on what English language speakers thought of the Byzantines..
Right, but it is nothing specific of English language.
Oh, and the original definition should be simply "born in Byzantium", now Istambul.
Byzantines were in fact well known for their diplomacy.
heh, seems so https://en.m.wikipedia.org/wiki/Byzantine_diplomacy