Russia-Saudi oil war threat to U.S. shale
April 1, 2020 - Russia and Saudi Arabia are boosting oil production, pushing down prices and threatening America’s heavily indebted shale industry -- U.S. shale oil companies need higher rates to remain profitable.
The U.S. Energy Information Administration (EIA) estimates that in 2019, about 7.7 million barrels per day of crude oil were produced directly from shale oil (also known as tight oil) resources in the U.S. This was equal to about 63% of total U.S. crude oil production.
A sharp plunge in demand for crude driven by the coronavirus pandemic -- and a subsequent oil price war initiated by Russia and Saudi Arabia -- has seen prices for U.S. benchmark West Texas Intermediate (WTI) crude fall by more than 68 per cent this year.
On Monday, WTI plunged to $20.09 a barrel -- down from $63.27 on January 6 -- far, far short of what American shale producers need to cover their costs of production.
The average breakeven price of oil has fallen around $2 per barrel over the past year, to $50 per barrel, according to the latest Dallas Fed Energy Survey.
Moscow wants to inflict economic pain on U.S. shale producers, to force the U.S. to lift sanctions in place over Russia’s 2014 annexation of Crimea, and the alleged part that the Russian government played in the 2016 U.S. presidential election.
If oil prices remain below $40 a barrel, highly leveraged U.S. energy companies could face bankruptcy. Russia needs about $42 a barrel to balance its budget, and Saudi Arabia needs $82, according to the International Monetary Fund.
Both nations should be able to survive a protracted economic war, as Saudi Arabia has foreign exchange reserves of $490 billion and Russia has reserves of $440 billion.