Inside Saudi Arabia’s Decision to Launch an Oil-Price War

Riyadh prepares emergency budget for $12-20 a barrel oil; “It’s all about egos now.”

Saudi Arabia and Russia intensified an escalating oil-market war on Tuesday, with Riyadh set to raise output to record levels and Moscow saying it was ready to pump more crude.

State-run Saudi Arabian Oil Co. said it would boost production to 12.3 million barrels a day in April, some 300,000 barrels a day over the company’s previous maximum sustained capacity.

Russian Energy Minister Alexander Novak, meanwhile, said his country could rapidly open its own taps.

Oil prices lost a fifth of their value Monday, after Saudi Arabia over the weekend slashed its crude prices and signaled it would boost its output next month. The move followed Russia’s rejection of a Saudi-backed plan by the Organization of the Petroleum Exporting Countries to cut crude output in response to dwindling demand in China and elsewhere.

Even as the price war escalated with fresh salvos from both sides, former Saudi energy minister Khalid al-Falih was in talks with Mr. Novak in an attempt to reverse the production hikes and revive the collective OPEC-Russia output curbs, according to Saudi-government advisers and officials.

Mr. Falih, who negotiated the initial production cuts in 2016, is now Saudi Arabia’s minister of investments. His outreach to Mr. Novak is done with the approval of Saudi authorities, the advisers said. If Mr. Falih’s mediation succeeds, the advisers and officials said, OPEC and its allies including Russia will convene an emergency meeting in April.

Mr. Novak said Moscow isn’t ruling out further cooperation with OPEC, adding that the next scheduled meeting is planned for May or June.

“The doors are not closed,” he said.

Amid the escalating fight, President Trump called Saudi Crown Prince Mohammad bin Salman on Monday to discuss global energy markets, the White House said Tuesday morning. The leaders also discussed “other critical regional and bilateral issues,” according to a statement.

Global GlutOil prices have fallen as demand from China has slowed and Saudi Arabia haspledged to pump more.

Saudi Arabia and Russia’s decisions to flood markets are surprising, as China—the world’s largest oil importer—has been hobbled by the deadly coronavirus, which has hurt its demand for oil after refineries and factories were forced to shut.

Saudi Arabia’s struggle for oil-market supremacy might earn it a sliver of market share at the expense of Russia and rival U.S. shale producers, but the cost of a price war might be too much for the kingdom to bear, analysts and oil officials say.

The combination of declining global consumption and rising supply pushed Brent crude, the benchmark for global prices, to its sharpest decline since the first Gulf War in 1991 on Monday. Some of these losses were recouped Tuesday as the Brent oil price gained 8% amid a broader revival in markets.

Saudi Arabia’s aggressive discounts are targeting some of Russia’s core markets in China and Northern Europe. The kingdom is also taking aim at U.S. oil producers, Saudi and OPEC officials said.

The Russian energy minister declined to comment and the Saudi energy minister didn’t respond to a request for comment.

Some oil officials say theystruggle to see the logic behind Saudi Arabia’s decisions. Others see the battle as tied to Prince Mohammed’s recent efforts to tighten his grip on power and raise his international clout, according to people involved in the OPEC talks.

Russia’s failure to find common ground with Saudi Arabia and OPEC on oil cuts was preceded by talks in early February between Riyadh and Moscow that focused on the possibility of forging a broader, long-term alliance. Under one scenario, Saudi Arabia would have sped up its investments inside sanctions-hit Russia and backed the Kremlin’s military efforts in Syria, according to people familiar with the matter.

Ultimately, the crown prince didn’t commit to a deal, say the people familiar with the matter, because he didn’t want to alienate the U.S. Weeks later, roughly at the same time that Russia was refusing to endorse the Saudi-backed plan to cut oil output, Mr. Putin was initiating a rapprochement with Turkey, a Saudi foe, the people said.

“It’s all about egos now, not about the oil market,” said a Saudi-government adviser.

Meanwhile, Prince Mohammed saw the OPEC debate as a way to assert his broad influence over the kingdom’s oil policies and to prove to his older brother, Saudi energy minister Prince Abdulaziz bin Salman, that he could force Russia’s hand, according to people familiar with his thinking.

In a terse phone call to Prince Abdulaziz late Thursday, the crown prince overruled his brother, who had agreed to a three-month production cut with OPEC, and extended the proposed cuts through the end of the year, these people said.

Prince Abdulaziz bin Salman, Saudi Arabia’s energy minister, on Thursday.

PHOTO: CHRISTIAN BRUNA/SHUTTERSTOCK

The crown prince ordered the minister to force OPEC to adopt the decision—even if that meant risking any hope that Russia would join in, they said.

Now the kingdom is pursuing a strategy of undercutting its rivals by drowning markets with cheaper oil—a move that has a tendency to backfire, say longtime market watchers.

On Saturday, the Saudi energy ministry told Aramco officials that instead of cutting production, they should pump more oil and lower the price. Saudi Arabia soon spread the word throughout the market. “It was the Saudi declaration of war against Putin,” said a senior Saudi official.

Within hours, officials at the finance ministry were tasked with preparing a budget scenario that envisions benchmark Brent crude prices dropping into a $12-$20 a barrel range. All Saudi ministries were also asked to cut their spending significantly to prepare for this scenario.

But the strategy has backfired before.

In 2014, then-Saudi oil minister Ali al-Naimi persuaded OPEC to pump at will to compete with U.S. shale producers. His rationale was that the cartel’s members had the ability to produce at extremely low costs. But after the price of Brent crude fell below $28 a barrel in early 2016, the Saudi royal family fired him. His successor, Mr. Falih, negotiated a pact between OPEC and Russia to cut production in the first OPEC+ deal. Within months, oil prices more than doubled.

The move to depress prices also missed its mark in the 1980s and led to a period known in oil circles as the “Lost Decade.” In 1986, OPEC faced competition from rising North Sea production. Saudi Arabia’s delegation was so upset about OPEC members flouting the group’s production agreements that it unleashed a flood of oil that sank prices for a prolonged period.

Eventually, Saudi Arabia backtracked and cut production, but the move wasn’t a complete failure, as it helped score a political victory against the Soviet Union. Riyadh had been backing insurgents battling Russia in Afghanistan—many of whom would later found al Qaeda. As the oil price fell to around $30 a barrel, Russia faced a budget crisis that contributed to food shortages and an end to its war in Afghanistan. Its then-leader Mikhail Gorbachev retreated from Kabul and launched the restructuring of Russia under his perestroika policy.

Russia is better prepared to weather low oil prices than in the past. Oil is now accounts for less than a third of budget revenue. The country has also accumulated massive reserves. The Russian finance ministry said Monday that it could withstand 10 years of prices at $25 to $30 a barrel.

Still, some Russian producers say the oil-market war is excessive.

“I’m in shock. This is a very unexpected, irrational decision to put it mildly,” Leonid Fedun, vice president of Russian private producer Lukoil was reported as telling Russian newspaper the Bell. Russian oil companies would like to increase production, he said, but that won’t make up for losses from falling prices.

The mood is more somber in Saudi Arabia, which needs oil prices over $60 a barrel to balance its budget, according to Saudi officials. The kingdom is now contending with its own coronavirus outbreak, moving Monday to suspend all air travel with many of its neighbors.

Saudi Arabia’s national oil company Aramco fell about 7% to 27.95 riyals ($7.45) a share on the Saudi domestic exchange Monday. The Saudi price decrease has “literally burned all global energy investors,” said a Saudi official. “[Saudi Aramco] Won’t sell a share to foreigners again,” he said, referring to the Crown Prince’s plan to list Aramco internationally.

Aramco Proposes Two-Stage IPO, Shunning London, Hong Kong

Tokyo emerges as surprise international front-runner for world’s largest listing

Saudi Arabian Oil Co. is considering a plan to split the world’s largest IPO into two stages, debuting a portion of its shares on the Saudi stock exchange later this year, and following up with an international offering in 2020 or 2021, according to people familiar with the plans.

The company is leaning toward Tokyo as the venue for the second phase of its proposed plan, the advisers and officials said, as political uncertainty in the U.K. and China reduces the appeal of London and Hong Kong’s markets.

Saudi Arabia’s state oil giant, also known as Aramco, revived plans to sell 5% of its stock in an initial public offering earlier this month aimed at funding Saudi Arabia’s efforts to diversify its economy beyond oil.

With earnings of $111 billion in 2018, Aramco is the world’s most profitable business, outstripping juggernauts such as Apple Inc. and Exxon Mobil Corp. But the company has seen many twists and turns on the road toward its IPO. Aramco and its advisers drew up for a potential listing in 2018, but the offering never materialized.

Everything from the fundraising amount, to the valuation of the company, to the venue for the listing, has been hotly debated, according to people involved in the discussions. The company had initially targeted raising $100 billion, but it remains unclear what the final number will be.

The outcry that followed the murder of Saudi journalist Jamal Khashoggi last October also complicated plans to attract investors, according to people familiar with the matter.

According to one plan under consideration, the company could seek to raise as much as $50 billion in a domestic listing, one person said. Both domestic and international investors would have access to the stock in a domestic listing.

If Aramco and its advisers choose Tokyo as the setting for the international offering, it would be a disappointment for London and Hong Kong, which were initially seen as the most likely locations for the listing. Both locales were considered politically safer than the U.S., but are now less likely, the people said.

Saudi Crown Prince Mohammed bin Salman has pushed for an IPO in New York as a way to deepen Saudi ties with President Trump. But Aramco Chairman Khalid al-Falih has opposed the U.S. option over concerns that Saudi assets could be targeted by terrorism-related lawsuits. The Justice Against Sponsors of Terrorism Act, passed in 2016, allows terror victims’ families to sue foreign countries for compensation.

The company could invite antitrust litigation if it were to list there due to its membership in the Organization of the Petroleum Exporting Countries and the cartel’s efforts to control oil production and prices. Aramco identified the risk of such litigation in its bond-offering prospectus.

London, which has lobbied Saudi Arabia to host the IPO, was seen as a favorite when Prince Mohammed visited the U.K. last year. But the Aramco advisers and Saudi officials said they were increasingly concerned about the regulatory uncertainty that could arise from the U.K.’s plan to leave the European Union on Oct. 31.

On Wednesday, U.K. Prime Minister Boris Johnson moved to shut down Parliament for several weeks, a tactic aimed at preventing opposition lawmakers from blocking the U.K. from exiting the EU without a deal.

An Aramco adviser said leaving without an agreement increased the chances that the U.K. would align its legislation with the U.S.—including the terrorism laws that have been an impediment to a New York listing.

Meanwhile, Hong Kong has been rattled by protesters who have fierce objections to a bill that would have allowed extradition of criminal suspects to China. The demonstrations have evolved into a broader pro-democracy movement and disrupted business and travel.

Aramco’s press office said the “company continues to engage with the shareholder on IPO readiness activities.” It “is ready and timing will depend on market conditions and be at a time of the shareholder’s choosing,” it said in an email comment.

The Saudi officials and Aramco advisers said no final decision has been made about where, or when, any listings would take place and all options remained open. Still, officials said they were leaning toward a listing on the Tokyo exchange.

A spokeswoman for the London Stock Exchange declined to comment. The Hong Kong bourse didn’t respond to a request for comment.

A spokesman at Japan Exchange Group Inc., which operates the Tokyo Stock Exchange, said Thursday, “there has been no change in the status [of a potential Aramco IPO] so far. But there has been no change in our attitude that we would like the company to come to the TSE.”

Japan Exchange Group’s Chief Executive Akira Kiyota has repeatedly expressed his eagerness to have Aramco listed in Tokyo. And in June, Saudi Arabia, which supplies about a third of Japan’s oil, mentioned “cooperation in the IPO of Aramco” in an outline for economic partnership with Japan.

The Tokyo exchange has attracted some of the world’s largest IPOs, including last year’s nearly $24 billion issue by SoftBank Group Corp’s mobile phone unit. It was the world’s second largest IPO after China’s Alibaba Group Holding Ltd. listing in 2014, and showed that the exchange can manage big debuts and serve a large pool of investors.

Aramco’s interest in pursuing a local listing emerged as the company has discussed with bankers the possibility of launching the IPO before the end of this year, and asked about the valuation Aramco might expect with a domestic-only offering, according to people familiar with the matter.

Prince Mohammed is looking to value Aramco at $2 trillion. Bankers and other Saudi officials say they believe a range of between $1.2 trillion and $1.5 trillion is more realistic.

The sale of a smaller amount through the domestic offering could bring Aramco closer to the crown prince’s goal by making it easier to ensure investors’ demand for the available shares exceeds supply, which would drive up the company’s ultimate valuation, some bankers suggested. In turn that valuation would set the floor for a subsequent listing on an international exchange in 2020.

Alternatively, Aramco could try to sell a stake to a so-called cornerstone investor such as a sovereign-wealth fund at the target valuation—ahead of the IPO, to establish a precedent, one banker said.

Bethany McLean | Saudi America

Bethany McLean discusses her new book which you can purchase here: https://www.strandbooks.com/product/s… The technology of fracking in shale rock — particularly in the Permian Basin in Texas — has transformed America into the world’s top producer of both oil and natural gas. The U.S. is expected to be “energy independent” and a “net exporter” in less than a decade, a move that will upend global politics, destabilize Saudi Arabia, crush Russia’s chokehold over Europe, and finally bolster American power again. Or Will it?

Investigative journalist and bestselling author Bethany McLean digs deep into the cycles of boom and bust that has plagued the American oil industry for the past decade, from the financial wizardry and mysterious death of fracking pioneer Aubrey McClendon, to the speculators who are betting on America’s ascendance and the collapse of OPEC in the great game of geopolitics. McLean finds that fracking is a business built on attracting ever-more gigantic amounts of capital investment, while promises of huge returns have often not borne out. Overeagerness in partaking in a boom can lead to all types of problems and just as she did with the Enron story, in Saudi America McLean points out the reality and the risks of the inflated promises of the fracking boom.

How The United States Got Hooked On Foreign Oil

The United States is predicted to become a net energy exporter by 2020. This will be the first time since 1953 that the country exports more fossil fuels than it imports. For almost a century prior, the United States of America was the largest oil producer in the world. So how did the United States get hooked on foreign oil.

Every American president since Richard Nixon has pledged energy independence as a way to strengthen us geopolitically, make us more secure, or boost our economy.

The story of American oil begins in 1859 in Titusville, Pennsylvania. Small amounts of oil had seeped from the ground for a long time, but no one knew how to extract it. Until, Edwin Laurentin Drake, a former conductor, was hired. After many failed attempts, he finally struck gold — black gold.

The next FEW decades, major oil finds in Texas, California and Oklahoma contributed to U.S. emergence as a major economic power. The 1901 Spindletop gusher in Texas nearly tripled U.S. oil production.

Henry Ford’s Model T invention in 1908 – the first mass-produced car – made America the most motorized country in the world. Other industrialized countries like France, Britain and Germany were ways behind.

OPEC Has a New Best Friend: Russia

Putin has helped resolve conflicts within the cartel, giving the country considerable influence over oil markets

When the Organization of the Petroleum Exporting Countries met in Vienna in December, it was in danger of imploding.

Oil prices had plunged. Member states Iran, Venezuela and Libya were refusing to cut production. Qatar had quit. And U.S. President Donald Trump was pressuring Saudi Arabia to keep prices low.

With negotiations teetering on the brink of failure, rescue came from an unlikely place—Russia, which isn’t even an OPEC member. President Vladimir Putin agreed to cut Russian oil production in league with OPEC, provided that Iran was allowed to keep pumping.

The degree of acrimony that pervaded that critical meeting, and the critical role Russia played in resolving the crisis, hasn’t previously been reported. What happened behind closed doors in December was a pivotal moment in Russia’s transformation from a nation that didn’t cooperate with OPEC at all to one that has become an indispensable partner.

Saudi energy minister Khalid al-Falih recently joked that he talks more with his Russian counterpart Alexander Novak than with some of his colleagues in the Saudi cabinet. “We met 12 times in 2018,” he said of Mr. Novak at a news conference in March.

At the next OPEC meeting, scheduled for May, Russia and Saudi officials will discuss whether to formalize what has been until now an temporary alliance.

For decades, the U.S. has embraced Saudi Arabia as one of its close geopolitical allies, selling it arms and encouraging its role as a stabilizing force in the Middle East. In exchange, Washington has come to expect a stable supply of oil to global markets to help damp price spikes and to prevent harm to the U.S. economy.

With its new ally in Russia, Saudi Arabia is no longer beholden only to Washington.

Under Mr. Trump, the U.S. has altered its longstanding, hands-off approach to the cartel. Mr. Trump has repeatedly tweeted for OPEC to boost output to drive oil prices down, and he has phoned the Saudi government directly asking the kingdom to open the taps.

“The United States-Saudi Arabia relationship plays a critical role in ensuring Middle East stability and maintaining maximum pressure against Iran,” said a senior Trump administration official. “The U.S.-Saudi relationship remains strong.”

The murder of dissident journalist Jamal Khashoggi at the Saudi consulate in Turkey last October created a fresh rift between the Saudi kingdom and the U.S.—and provided an opening for Russia to insert itself further into OPEC.

.. Oil prices had cratered in 2016 and didn’t look likely to rebound. The three men needed to orchestrate a deal to reduce crude output to lift global prices. Russia and OPEC agreed to cut production.

By the middle of last year, crude was soaring again, thanks to lower output from OPEC and Russia and renewed prospects for global economic growth. By the end of the year, however, amid a U.S.-China trade battle, the world’s economic outlook was dimming.

As the December OPEC meeting loomed, oil prices had plunged some 30% in six weeks. The Saudis needed unanimous agreement on proposed production cuts to shore up prices. Iran, already hobbled by U.S. sanctions that began in November, was reluctant to curb its output. Libya and Venezuela, with domestic troubles of their own, also were holdouts.

With the cartel about to meet in Vienna, Qatar, Saudi Arabia’s neighbor in the Persian Gulf, shocked global oil markets by announcing it was leaving OPEC. It was among a small group of member countries that felt overshadowed as the Saudi-Russia alliance grew stronger. OPEC has become “basically all about what [Prince Mohammed] and his buddy Putin want,” says a Qatari official.

.. When Mr. Falih asked Iran to join the collective production cut, Iranian oil minister Bijan Zanganeh rejected the demand and blamed Persian Gulf countries for replacing Iran’s sanctioned oil. According to the people familiar with the conversation, he pointed his finger at Mr. Mazrouei, the Emirati minister in charge of the meeting, and said: “You are the enemy of my country.” Mr. Zanganeh then threatened to suspend Iran’s membership in OPEC, these people said. Spokesmen for the UAE and Saudi Arabia’s energy ministries couldn’t be reached for comment.

 .. Mr. Novak acknowledged that Russia would benefit from the cartel’s cuts. “We need $60 a barrel and we are under sanctions” from the U.S., OPEC officials recall him saying.When Mr. Falih re-entered the OPEC meeting room, he was beaming.

The coalition began curbing output in January. Oil prices have risen 30% since the beginning of the year, their best annual start since the early 1980s.

Saudi Arabia says it has trimmed more than it promised. Russia had pledged to curb production by 230,000 barrels a day, but in March it had slashed daily output by just 120,000 daily barrels, according to OPEC and Russian officials.

Saudi officials say Riyadh is willing to overlook Russia’s shortcomings because it needs support on the international stage. “We cannot afford to lose them,” says one Saudi official.

The Flaw in Trump’s National Security Tariffs Logic

Levies don’t go far enough to eliminate reliance on foreign steel and aluminum, suggesting what’s really at work is plain old trade protectionism

.. You can’t make aluminum without bauxite, yet the U.S. is completely dependent on imports for bauxite; the last domestic mine closed nearly 30 years ago.

the U.S. has less than half the iron ore reserves of Russia and China “since we have been using up our iron ore at a substantial rate for more than 100 years” and U.S. ore has a much lower iron content than theirs. Stimulating domestic production via import tariffs, he said, will speed up the depletion of those reserves.

.. In fact, punishing trading partners can increase national security risk, which Mr. Horlick considers another lesson of the oil saga. After Eisenhower exempted Canada and Mexico from the quotas, Venezuela asked for the same, noting it had been a reliable supplier during World War II and hadn’t nationalized its industry, as Mexico had.

.. Venezuela’s oil minister went to Washington to propose a Western Hemisphere system under which Venezuela would be guaranteed a share of the U.S. market.

When he got nowhere, he traveled to the Middle East and helped found OPEC, which embargoed the U.S. in 1973.

How Trump Can Harness the U.S. Energy Boom

The embrace of new technologies to extract oil and natural gas at an unprecedented rate has transformed one of America’s enduring vulnerabilities into a strategic asset. Thanks largely to fracking — hydraulic fracturing of rock — the United States is now the largest producer of oil and gas combined in the world. America consumes large quantities of energy, so this expanded production has not yet made the country energy independent. But it has greatly decreased its dependence on foreign energy: About a decade ago, the United States imported nearly two-thirds of the oil it consumed; that percentage is now closer to one-fifth.

..  an improved trade balance and a stronger economy. The boom has also improved the country’s sources of soft power, in part by underscoring America’s enduring edge in innovation and ingenuity.

.. American producers of oil from shale rock have introduced a new business model to the scene: Small investments in exploration and production can bring oil to the market quickly. This weakens OPEC, by making it more difficult for its production cuts to result in sustained increases in oil prices. For the first time in more than a century, the market determines the price of oil with much less influence from any cartel, commission or band of big oil companies.

.. The energy boom has also weakened many of America’s competitors, particularly Russia, by both decreasing its revenues and reducing its ability to use its energy resources as a political cudgel.

.. The boom also expands opportunities for the United States to forge new partnerships. For instance, given China’s growing dependence, and America’s waning reliance, on Middle Eastern oil, Beijing may be more likely to work with the United States to stabilize that part of the world. Such changes put America in a stronger position to reinforce the international order.

.. Many non-energy policies of the Trump administration undermine the energy boom and all its potential advantages.

.. On climate, Mr. Trump’s pledge to withdraw the United States from the Paris agreement could also hurt the American energy boom. Natural gas stands to gain as the world takes strides to tackle climate change: As countries transition to more sustainable energy, they often move away from coal to natural gas. American natural gas exports could benefit from this transition — but not if countries like China and India also weaken their commitment to tackling climate change and drag their heels in curbing coal consumption.

.. Mr. Trump’s talk of retrenchment overseas has made friends and foes nervous about America’s willingness to continue to use its vast sea power to maintain open shipping lanes. Over half of the world’s oil supply and a growing percentage of the natural gas it consumes is transported through these waterways.

.. Mexico is by far the largest foreign consumer of American natural gas — a trend that will increase with recent Mexican electricity reforms. Yet President Trump’s talk about a border wall has spurred a revival in the presidential candidacy of Mexico’s own populist, Andrés Manuel López Obrador, who is committed to reversing these and other energy reforms. That would not only shrink the largest market for American natural gas but would also dull prospects of the United States, Canada and Mexico of reaching North American energy independence.