Sunday, March 08, 2020

Nyet

The big-big news is always underreported by the (((media))), if it is mentioned at all, but the American financial (((media))) can't help but at least mention this.

"Russia Just Told The World, "No."" (Luongo),  You'd almost think Russian leaders had IQs over 80 and a plan:
". . . the most important geostrategic question is, “Who produces the marginal barrel of oil?”
For more than three years now, President Trump has supported his policy of Energy Dominance in a Quixotic quest for the U.S. to become that supplier.  Trillions of dollars have been spent on building up domestic production to their current, unsustainable levels.
This policy pre-dates Trump, certainly, but he has been its most ardent pursuer of it, sanctioning and embargoing everyone he can to keep them off the bid.
What he could never do, however, was push Russia off that bid.
The reason U.S. production rates are unsustainable is because their costs are higher per barrel than the marginal price especially when all other prices are deflating.  Simple, straightforward economics. 
If they were, on balance, profitable then the industry as a whole would not have burned through a few hundred billion in free cash flow over the past decade.
That’s where the Russians’ power comes from.  Russia is one of the lowest cost producers in the world.  Even after paying their taxes to the government their costs are far lower, close to $20 per barrel break-even point, than anyone else in the world when one factors in external costs.
When you don’t owe anyone anything you are free to tell them, “No.”
Sure, the Saudis produce at similar cash costs to the Russians but once you factor in its budgetary needs, the numbers aren’t even close as they need something closer to $85 per barrel.
They can’t tell their people, “No,” you have to do without. Because the populous will revolt.
Russia can ride out, if not thrive, in this low price regime because :
  1. the ruble floats to absorb price shocks in dollars.
  2. A majority of their oil is now sold in non-dollar currencies – rubles, yuan, euros, etc. – to lessen their exposure to capital outflows
  3. the major oil firms have little dollar-denominated debt
  4. low extraction costs.
  5. its primary governmental budget ebbs and flows with oil prices.
All of this adds up to Russia holding the whip hand over the global market for oil. 
The ability to say, “No.”"
"Putin Launches "War On US Shale" After Dumping MbS & Breaking Up OPEC+" (Durden).

"Saudi Arabia Starts All-Out Oil War: MbS Destroys OPEC By Flooding Market, Slashing Oil Prices" (Durden):
"According to one take, the shock-and-awe Saudi strategy could be an attempt to impose maximum pain in the quickest possible way to both Russia and other producers, most notably shale, in an effort to bring them back to the negotiating table, and then quickly reverse the production surge and start cutting output if a deal is achieved.
While that's certainly possible, it has already been tried once - back in 2014/2015 - and the result was humiliation for Riyadh as not only shale came out stronger, but Russia had no problems absorbing the lower prices. Instead, the most likely outcome is that Russia will be able to withstand a shock price far longer than Saudi Arabia, which has budgeted for a Brent price of $58/b for 2020 (which would lead to a 6.4% budget deficit). A realized price which is roughly half that - should the Saudi strategy work out as planned - would lead to social unrest and government turmoil in Saudi Arabia, and may explain why earlier today Saudi crown prince MbS launched another crackdown on dozens of royals and army officers following the arrest of powerful princes, who may compete for the throne once the public mood in Saudi Arabia turns nasty in the coming weeks."
"Saudi Arabia - As New Budget Problems Arise The Clown Prince Arrests More Family" (Moon).

The timing is critical, with the Russians anticipating massive financial disruptions due to the panic over the virus.  The American stock market is a bubble where the ridiculously high stock prices maintain the accounting illusions that keep the banking industry loans to the frackers just this side of legally sustainable, and the whole house of cards comes down once the too-big-to-fail banks are revealed as technically insolvent due to their fracking loans.  Russia doesn't want to see a full collapse, but I imagine we'll see an American government backing off the Peak Asshole attitudes towards Russia (they could start by reducing the unrelenting pressures in Europe, Ukraine, and Syria), with Putin then partially pulling back the 'nyet'.
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