Will US Energy Companies Pay The Price of Putin’s Oil Price War With Saudi Arabia?

Russian President Vladimir Putin has started a conflict with Saudi Arabia that is likely to escalate into a big oil prices war. American energy companies may have to face the brunt of this oil price war.

Saudi Arabia recently raised the crude oil prices for Chinese customers to US $6 or $7 per barrel. It is also likely to raise its daily crude output by as many as 2 million barrels per day into an already oversupplied global market.

Saudi Arabia made this move to counter the recent act of Russia reducing its oil prices. The move by the Saudis is a step taken that aims to grab a market share and send a clear message to Moscow. The dramatic action is also a response to a contentious, and ultimately failed, the Organization of the Petroleum Exporting Countries (OPEC) meeting in Austria last week. In the meeting, OPEC members laid out a proposal to further cut oil output quotas by as much as 1.5 million barrels per day.

Despite OPEC being aligned on the deal, non-OPEC member Russia refused to accept the deal, effectively killing it. Three weeks ago, the Trump administration of USA had imposed sanctions on Russian oil giant Rosneft for transporting Venezuelan oil. Secretary of State Mike Pompeo alleged that Rosneft was helping Venezuela sell oil to help Maduro regime. Rosneft boss Igor Sechin is a former employee and close friend of Putin. Russia‘s decision to reduce its oil prices might also be seen as a retaliation against sanctions imposed by Trump Administration.

According to Moody’s, the American oil and gas industry has about $86 billion of rated debt due in the next four years.  Nearly all of that debt is either junk rated, or rated just above junk. 57% of that is due in just the next two years. Falling oil prices fall and tight credit markets are making it difficult for many companies to refinance their debts or extend maturities. The shares of Chevron are down by 20% in 2020. This makes it the best performing energy stock in USA. Most of the shares are down by 30%, 40% or even 50% since 1 JAN 2020.  The S&P Oil & Gas ETF (XOP) is down 33% this month.