The First Victims Of The Oil Price War
Kimani – Mar 31, 2020
As the oil price war and coronavirus pandemic rage on,
it’s becoming increasingly clear that the energy market can remain choppy and
irrational longer than entire nations can stay solvent. Everybody is
watching to see which of the leading protagonists between Saudi Arabia and
Russia is going to be the first to blink as high supply and low demand threaten
to overwhelm available storage
facilities. Scores of oil-producing countries have adopted a raft of
austerity measures and spending cuts as they attempt to outlive the biggest oil
bust in living memory.
Unfortunately, it’s the riskier corners of the global
financial markets that will emerge as collateral damage in the ongoing oil
American credit rating agency Moody’s has warned the
dramatic plunge in oil prices is likely to cut fiscal revenue and exports for
most exposed oil-exporting sovereigns by more than 10 percent of GDP and,
consequently, weaken their credit profiles.
Russia: Most Resilient
According to Moody’s, the sovereigns most vulnerable
to low oil prices in the 2020-21 period are those with the highest reliance on
hydrocarbons for fiscal exports and revenues coupled with a limited capacity to
The credit agency says the most vulnerable sovereigns
are Oman, Iraq, Bahrain, and Angola due to their limited capacity to adjust to
external shocks. These nations could see a decline in fiscal revenue in the
range of 4-8 percent of GDP if low oil prices persist.
The vast majority of Gulf Arab states are unable to
balance their budgets with oil prices of $40 per barrel, let alone the current
$20/barrel level. These developing economies are especially vulnerable due to
ongoing massive cash outflows, with investors continuing to liquidate
In contrast, Russia, Saudi Arabia, Qatar, Azerbaijan,
and Kazakhstan are seen as being less vulnerable, with expected declines in
fiscal revenue and exports of less than 3% of GDP.
Interestingly, Moody’s analysts concur with a previous OilPrice.com opinion piece, which argues
that Russia has the upper hand in the oil price war.
Moody’s sees Russia as being less vulnerable to
external shocks and turbulence in energy markets than most oil-exporting
nations due to its massive forex reserves as well as a flexible exchange rate.
Indeed, the lifting cost per barrel of oil equivalent
for Russia’s largest oil producer, Rosneft, is now lower than the same
metric for Saudi Arabia’s oil giant, Aramco – thanks mainly to a weaker
The ruble has weakened about 15 percent against the
U.S. dollar over the past 30 days, recently hitting a four-year low against the
greenback after the oil markets imploded. Russia, though, says it’s quite happy
with oil prices in the range of $25 to $30 per barrel and can hold out at these
levels for 6-10 years.
In fact, Russia’s Energy Minister Alexander Novak
recently declared that Russian oil companies would remain competitive “at any
forecast price level.”
One of the key factors working in Russia’s favor is a
flexible exchange rate that allows its oil companies to collect revenues in
dollars but pay their own expenses in rubles. A weakening ruble vs. the dollar
can mean considerable margin expansion for Russian energy firms, as evidenced
by Rosneft’s average lifting cost, which has fallen from $3.10 per barrel of
oil equivalent last year to just $2.50 currently.
That’s even cheaper than Saudi Aramco’s figure, which
has remained in the $2.50-2.80 range.
That’s the case because Saudi Arabia’s currency, the
riyal, is pegged to the dollar at a fixed exchange rate. This means that the
dollar costs for Saudi Aramco have remained roughly the same even after the oil
By the same token, oil producers like Nigeria that
defend a fixed exchange rate are likely to feel the heat more. The Nigerian
government imposed currency controls to stem dollar outflows during the 2016
oil bust. Unfortunately, this has not stopped reports of a shortage of dollars in
the giant African producer just weeks into the oil price war.
Can U.S. Shale Survive?
The U.S. shale oil and gas industry was facing an
uncertain future long before the oil price war and consequent market
crash thanks to burgeoning supplies, lackluster prices, increasing competition
from renewable energy, and dwindling capital that pushed a record number of
companies into bankruptcy.
As with the last oil bust, only the most robust,
best-financed, and most efficient shale companies are likely to survive if
prices remain depressed over a long period, once again reshaping an industry
into one that is leaner and smaller. Pundits have already warned of a fresh wave of defaults and Chapter 11
bankruptcies this year, with oilfield services companies seen as being
especially vulnerable. Dozens of shale companies have started idling rigs in
the Permian while scores have announced dramatic cuts in shareholders programs,
including share buybacks and dividends.
Despite the neverending turmoil, the U.S. shale sector
is likely to survive the latest bust thanks to oil demand, which is expected to
continue growing over the long term.
Consolidation and bankruptcy are actually good things
for the bloated industry because it will help pool resources among the stronger
remaining players, thus making for a more resilient sector in the coming years.
By Alex Kimani for Oilprice.com