Bloomberg reports Aramco Slashes Crude Pricing, Starting Oil War as OPEC Flops.
Saudi Arabia kicked off an all-out oil war on Saturday, slashing official pricing for its crude and making the deepest cuts in at least 20 years on its main grades, in a bid to push as many barrels into the market as possible.
The cuts in monthly pricing by state producer Saudi Aramco are the first indication of how the Saudis will respond to the breakup of the alliance between OPEC and partners like Russia. The kingdom plans to accompany the price cuts with a hike in crude supply, according to people with knowledge of the situation.
What’ Going On?
Saudi Arabia and Russia want to kill the US oil industry and frackers.
The Financial Times reported “Russia has had enough of the shale guys living off Opec-plus,” said one person familiar with negotiations, referring to the cartel and allied non-members.
Junk bonds would get crushed over this. And that will take the market with it.
Blackmail Revenge
Please recall Trump Blackmails Germany With Sanction Threats Over Nord Stream 2
“Angela [Merkel] you got to stop buying gas from Putin,” said Trump.
$36 at the Open Today?
That about 25% lower!
Below is the international benchmark, Brent. If Fisher is correct, it should open about $36.
This is going to leave a mark … a big mark! https://t.co/KdAdzG7R6D pic.twitter.com/qA8UbUDOjE
— Jim Bianco (@biancoresearch) March 8, 2020
We find out in about an hour.
Crude Collapses Since Start of Year: A Credit Implosion Up Next
On Friday (before the oil price war was official), I commented Crude Collapses Since Start of Year: A Credit Implosion Up Next
Credit Implosion Coming Up
A lot of leveraged drillers and crude suppliers dependent on prices above $50 will see a credit implosion.
That’s just a start.
Supply and Demand Shock
A Supply Shock and a Demand Shock are Coming Up.
Deflationary Outcome
As noted previously, a Very Deflationary Outcome Has Begun.
Blame the Fed.
Deflation is not really about prices. It’s about the value of debt on the books of banks that cannot be paid back by zombie corporations and individuals.
See the previous link for discussion.
Liquidity Crisis in Energy Space
What better time than now to blow up US oil producers heavily in debt as an act of revenge?
The liquidity crisis will quickly spread far beyond energy.
Mike “Mish” Shedlock
Saudi Arabia has debts to pay, it had to cut prices and increase production.
The real story isn’t the effect on Saudi Arabia or Russia or the USA, it’s the effect this will have on the rest of the world’s oil producers who borrowed in dollars and now can’t pay those loans back with oil priced this low.
Make no mistake, the US banking system is highly vulnerable to the shale debt significantly going bad. And because shale production depletes so quickly, the assets may not be viable by the time the bankruptcy process has run its course. At least if oilsands assets in Canada end up defaulting and being taken over by creditors, there’s easily a few decades of reserve life remaining and inevitable upside for the asset if held long enough.
My concern (as an American) is that Russia can produce oil (given all the stupid embargo’s we (and the world) have placed on Russia) much cheaper than the USA can….
Let that think in….
They can compete better than we can…
Truthseeker I can see your comments and so can others.
After you post a comment, you may need to refresh your screen. Happens to me all the time.
Me too. I wondered why my comments seemed to disappear until I realized you have to refresh to see them. Just a weird thing with this site.
Still way too high,if based on demand oil should have never risen above $10-11 per barrel.The Fed has been propping it up since 2014,the problem they now face is continued relentless collapse in demand,now they’re faced with printing trillions DAILY to prop up everything to buy time till after the election,then everything crashes an burns!!
So, according to Mish, Saudi Arabia is allying with Russia to destroy United States oil production?!
Absurd.
As usual lately, he’s completely wrong. Anyone remember Iran attacking Saudi Arabia by drone six months ago? The combination of COVID-19 impacting Iran’s second world medical system, the the impact of that loss of economic activity in an already wounded economy and the loss of future oil revenue will most likely cause a revolution in Iran.
I think the Saudis saw a replay of the mid 1980s coming and went all-in to prevent it and send a message to Putin. Opec members were cheating massively then on “agreed” quotas and SA was cutting production to maintain prices. It almost took them out of the oil business doing it. They were down to less than 4 million barrels per day when they lowered the boom then…like they’ve done now.
I suspect everybody in the oil business, Opec and others, are about to discover, again, the need to listen when SA speaks.
If MBS can convince his relatives and countrymen to accept some temporary “austerity” (which is Saudi is rather relative…); the only real recourse for Russia, is missile “sales” to Houthis and “Iranian” militias, and fomenting domestic discontent in Saudi itself.
Agreed. I disagree with Mish that this is about the USA. This is about internal OPEC controls. They all need certain levels to make money too!
Monetary stimulus will be ineffective. The pain is coming.
As crazy as it sounds, whoever the Dems put up may walk into the White House. Trump is not showing leadership on the Coronavirus and he’ll jawbone the Fed for negative rates.
Negative rates are a super tax on Baby-Boomers who have saved and now have to eat into assets to live.
Start saying it: President Bernie or President Biden or President Hillary…
Crude Opened – down 11.00 or so and touched near $30. Up about $2 now but gyrating wildly
Mish,
The Day of Reckoning cometh…..
My take is Gx have spoken to Opec+ and asked for price cuts to help lighten load on consumers and industry as the world slows rapidly.
Fuel prices are a tax and what is needed now is reduced load on consumers/demand. Opec+ is responding. I doubt its personal against frackers.
Saudis would rather act now than see demand simply collapse on a global depression. Fracker debts will come due but that’s a secondary effect.
Saudis dropping prices is a sign we’re in the toilet but it’s not retaliatory. It’s all hands on deck.
Guess I’ll wait a couple days to fill my tank.
BTW spot gold hit $1699.
Update 19:42 NY time: Gold topped $1700.
Buy any dip on Gold…..
All kinds of credit problems will arise the longer cash flows are hurt by the virus. Many small businesses that operate on thin finances and the 80% of Americans who live paycheck to paycheck will be wiped out and those jobs and demand will not come back in a V. Remember just like the mortgage debacle a credit crisis starts from the weakest credits and works it’s way up the latter. Just a thought from the old bond trader.
As pointed out in this blog and others, there are at least three massive bubbles: stocks, real estate and low-grade corporate bonds. Even before the coronavirus, these three seething pits of malinvestment and zombification were ripe for implosion. Yet each day, they defied gravity and got bigger, seemingly with no end in sight.
Well, if more than a pin was needed to prick them, now they have a microscopically sharp spear poised to skewer all three bubbles simultaneously!
Demand is needed. Liquidity wont do it. Tax cuts might.
Fuel is a tax. Saudis are co-operating with Gx to help alleviate pressures as interest rates wont do it.
It’s actually an attempt to help slow down spiral into depression.
3 bubbles the Fed must not let deflate (ever),stocks,bonds,oil,which means tens of trillions will have to printed (right now)to buy more time.If any of these schemes even drop 30-40%,the Trump govt will collapse on it’s ass which means a military junta will seize power and declare martial law.
Extra liquidity won’t work anymore, it’ll just be confirmation of how bad everything is. The dollars already teetering. If they want to buy stocks the market should sell to them, they’ll be the best bid.
State (i.e.FED) controlled financial capitalism. Russia might be fed up, but underestimate the FED capacity to directly subsidize frackers.
Price wars for now.
But these are the kind of things that can start shooting wars…
My take is Gx have spoken to Opec+ and asked for price cuts to help lighten load on consumers and industry as the world slows rapidly.
Fuel prices are a tax and what is needed now is reduced load on consumers/demand.
Opec+ is responding. I doubt its personal against frackers.
Saudis would rather act now than see demand simply collapse on a global depression.
Roughly
World oil 100 million bpd
Allow prices to drop 50 dollars by not restricting output = 5 bn dollars a day equivalent “distributed” worldwide.
5 bn a day, is that going to make a difference ?
(I don’t know because I’m not familiar with global trade figures of all goods, for example)
Yes, it all helps. It’s all hands on deck. Both supply and demand shocks at the same time. Liquidity wont get into the hands of ordinary people fast or at all. Pump price reductions do. Same for hauliers. Cutting energy costs is necessary now. Saudis responding.
“But these are the kind of things that can start shooting wars…”
You mean, like missiles leaving unidentified subs in the Gulf for Saudi refineries, while trying to look like they came from Iran?