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Will Putin Bring Mideast Oil to a Boil?

Will Putin Bring Mideast Oil to a Boil?

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Wednesday, 14 October 2015 10:31 AM Current | Bio | Archive

U.S. shale energy producers may be loyal Americans, but some are secretly cheering for Russia right now. Vladimir Putin’s incursion to Syria may be their best hope for higher oil and gas prices.

Is this likely? No, but drowning men will grab whatever they see.

It is hard to overstate the financial stress that smaller U.S energy businesses feel right now.

The big publicly traded players can raise capital with new equity or high yield bond issues.

The small fry don’t have those tools. They depend on bank credit – which is increasingly harder to get.

Bankers in this niche hold semiannual “redeterminations” every April and October, at which they reset interest rates and credit limits. In the last review six months ago, West Texas Intermediate spot crude was close to $60 and trending higher. Now it is struggling to move over the $50 mark.

This puts small fry oil producers in a bind. Many are already operating at negative cash flow as operating wells costs more than the revenue they produce. Borrowed money makes up the difference.

The oil price matters for another reason, too. Reserves in the ground often serve as security for the loans. When collateral loses value, banks lend less. Pressure from regulators to tighten lending standards isn’t helping, either.

Enter Putin. Last month the Russian air force joined the Syrian fray on the Assad regime’s side.  The Obama administration’s Syria strategy, never coherent in the first place, is now in shambles.

Watching Syria now is like a football game with eight teams on the field and only three uniform colors. You can’t tell the players even with a program. It is a mess.

Moreover, all these armed players in close proximity raise the odds of a deadly “accident.”

Russian planes have already crossed into Turkish airspace.

Turkey is a NATO member. If Ankara asks for aid, the entire alliance must respond. Putin’s cruise missile launches from the inland Caspian Sea were a warning to the West:

Russia has ordnance in range. Any such conflict would probably give oil prices a boost.

Meanwhile, Saudi Arabia is still vulnerable to ISIL or internal threats. The kingdom’s military might, such as it is, remains fully occupied in Yemen to the south. Between the Yemen operation, domestic welfare, and aid to Sunni groups all over the region – including in Syria – Saudi bank accounts are dwindling quickly.

If Putin changes the Syrian chemistry, it is entirely possible Saudi Arabia’s oil reserves will change ownership in the next few months. The odds are still against it, but the risk is not zero. That alone will add a risk premium to global oil prices.

If Saudi oil stops flowing, prices would jump – and not everyone would complain. Spiking oil prices would change economic trends all over the globe, helping the U.S. oil industry and everyone else with oil to sell (like Vladimir Putin).

Will it happen? Probably not. The more likely scenario is Putin will keep everyone on edge, provoking just enough violence to boost energy prices without starting a war he would ultimately lose.

The question for us is whether this new fear factor is strong enough to offset the excess oil and gas supply that has held down prices worldwide. My best guess is no, unless something happens to interrupt Saudi oil exports.

If a looming U.S./Russia Mideast standoff only adds $10 a barrel to oil prices, it will take more than vague fears and localized violence to overcome the supply glut. That extra $10 serves only to bring new supplies online, which push the price right back down.

Bottom line: Crude oil isn’t coming back. The U.S. energy sector needs to accept that reality.  So does Putin.

Will he accept it? Eventually, yes, but only when he has no other choice.  Look for more fireworks until then.

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PatrickWatson
Crude oil isn’t coming back. The U.S. energy sector needs to accept that reality. So does Putin.
crude, oil, investing, putin
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2015-31-14
Wednesday, 14 October 2015 10:31 AM
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