On the brink of an economic quarantine

Saudi-Russia Row
Saudi Crown Prince Mohammed bin Salman and Russian President Vladimir Putin.

Much has been said and written about the conflict between Russia and Saudi Arabia over crude oil production cuts, and the conversations, or more accurately the lack of them happening between the two parties.

I can only summarize this as dangerous, and politically short-sighted gamesmanship.

Either side may think they will win, but the longer this game goes on both sides may end up losing. Currently, both players are being blinded by their own flashes of arrogance as each chooses to ignore the dictum of supply and demand.

There is no, or at best little demand for the product they are oversupplying, and now there is a third player in the game with a much bigger bat: the Covid-19 pandemic.

Neither Russia nor Saudi Arabia is the world’s largest oil producer – the U.S. is — and they now find themselves on the brink of an economic quarantine. Flooding global crude supply and lowering prices is pointless and dangerous.

Pointless for the above supply reasons, and dangerous because when this virus is forced to go away, U.S. President Donald Trump or his successor will carry an even bigger bat in the form of revenge. In fact, Trump could be the fourth player in today’s game with the ability to quell this Saudi/Russian dispute to the relief of both parties.

It is the general opinion that the OPEC family needs crude to price out at $51/bbl to balance budgets and maintain social programs. Although the OPEC head is Saudi Arabia who, as the lead producer with the deepest wells can afford to live with crude below $30, other cartel members, governed by unstable leaderships, cannot survive with that number — and if forced to — they will no doubt break away from the cartel leaving the Saudis alone to fight the Russians and North Americans.

Moving to the Russian front, it is believed that the bottom line there is $40/bbl, and it is claimed that they can live long and hard with this price.

Personally, I don’t believe a word that comes out of Russian President Vladimir Putin’s mouth, and I believe I’m in the majority on that one. Putin is not an ethical altruist. He’s motivated by one thing and one thing only: power. Anything that would threaten to tarnish this image internationally or domestically is a red flag for this bull.

It’s obvious to me that Putin didn’t want to lose face and bow to Saudi demand to cut back crude production in order to increase the price of crude. Putin doesn’t take orders from anyone, dontcha know? So, we’re talking about losing face on one hand and losing market share on the other. The market share question is not necessarily between the Russians and the Saudis as they have an unwritten agreement on who has what part of the global pie.

Putin’s real target is U.S. shale oil, which has a voracious appetite for Russia’s market share. I can only envisage Russia drumming its fingers across the table and grinning widely as crude prices drop and U.S. shale producers fall financially into the roadside ditch.

This is because U.S. shale needs crude at $50 to $60/bbl to generate cash flow and maintain production.

The only way out of this crude oil pricing dilemma is for the U.S. to intervene, or invite itself to the table. If U.S. shale oil production is the problem then what if the U.S. offers to unilaterally cut back their production?

Would the Russia/Saudi tandem go along for the ride?

Perhaps it’s time for Putin to heed the lyrics in the classic Bob Seger tune, Still the Same:  “The trick to winning is never play the game too long.”

~ The Grouch

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Roger McKnight is the Chief Petroleum Analyst with En-Pro International Inc.
Roger has over 25 years experience in the oil industry, and has held senior marketing management positions responsible for national and international accounts. He is the originator of the card lock concept of marketing on-road diesel that is now the predominant purchase method of diesel in Canada. Roger's knowledge of the oil industry in North America, and pricing structures has resulted in his expertise being sought as a commentator by local, national, and international media. Roger is a regular guest on radio and television programs, and he is quoted regularly in newspapers and magazines across Canada.

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