RPT: ANALYSIS - Saudi Oil Price War Targets US Fracking Industry

WASHINGTON (UrduPoint News / Sputnik - 13th March, 2020) Saudi Arabia's oil price war launched last week is targeting the US fracking industry because Riyadh wants to once again control the world oil market, analysts told Sputnik.

Crude prices slumped by over 30 percent earlier this week, their biggest fall since the 1991 Gulf War, after the OPEC+ alliance failed to agree on a new production cuts deal last week, although there was a slight rebound.

The key breakeven sustainability oil price for domestic US shale producers is usually put at $68 a barrel. The Saudis in their price cutting wars with Russia and the United States have now driven the Brent crude spot price down to around $32 a barrel.

On Thursday morning, Brent crude, the international standard, fell $2.90, or 8.1 percent to $32.89. Benchmark US crude lost $2.36 to $30.62 per barrel.

"The Saudis want to control the world oil market," financial analyst and former London merchant banker Martin Hutchinson told Sputnik. "To achieve this, they want to knock out the marginal top US oil producers: They want to bankrupt the US fracking and shale oil industry producers."

These prices are likely to threaten trillions worth of holdings on US bond markets, Hutchinson warned.

"The rapid expansion of the domestic US fracking industry was financed by junk bonds and triple B rated bonds on Wall Street. After 11 years of effectively zero percent prime interest rates, that junk market has now swelled to $1.2 trillion," Hutchinson pointed out.

The triple B-rated bond market is even vaster and almost as unsound," Hutchinson continued.

"It is now worth $3 trillion. And it is very wobbly. Therefore a collapse in oil prices threatens both those colossal bond speculative bubbles with collapse and ruin," he said.

The US junk and triple-B-rated bonds markets were both currently grossly overextended, Hutchinson explained.

"It is grossly overextended. Once one junk or even tripled B rated bond issue goes, the rest will topple rapidly after them, like lemmings stampeding or falling off the edge of a cliff," he said.

The Saudi policy appeared to be more targeted against the United States than Russia, Hutchinson pointed out.

Once US fracking companies collapsed in the coming bonds crisis, it would be very difficult to recapitalize the fracking industry within the United States, he warned.

"The big banks are now all run by fashionable environmentalists who are hostile to fracking and would not know how to finance and set up a serious fracking or other oil retrieval business even if they wanted to," he said.

The world's largest oil exporter, Saudi Arabia, is preparing to boost deliveries to Europe with huge discounts, and the price will be much lower than Russian oil, Bloomberg reported on Thursday.

According to the Bloomberg, Saudi Arabia is offering European oil refineries up to triple the usual volumes of its main Arab Light crude brand with deliveries to Rotterdam at just $25 per barrel, a huge discount to Russia's Urals crude brand.

Retired Brown University Assistant Professor of Economics Barry Friedman told Sputnik that the Saudi moves were dangerous high risk ones that could easily plunge the global economy into depression,

"This is a moment of fear and trepidation in the United States that we may rollover into a recession due to the worldwide challenge of the coronavirus. In that context, the lowered oil prices will threaten the domestic petroleum producers," he said.

The US oil producers could then become insolvent with a significant impact on bondholders, stock investors and lenders, Friedman warned.

"A rush to safety in Treasury bonds, and dumping of energy securities has followed this week in the wave of markdowns in the stock market," he observed.

Russia produces about the same amount of oil per day per day as the United States or Saudi Arabia, Friedman noted.

"The Saudi's have picked a good time of vulnerability for making their play," he said.