What price level will Russia and Saudi Arabia find satisfactory?
OPEC+'s decision to cut oil production until the end of the year, driving up oil and gas prices and increasing inflationary pressure that threatens the economic health of the United States and its allies, is causing problems in West, and beyond. As we wrote today, inflationary expectations are on the rise and this puts pressure on fragile European governments in an election year, not to mention Biden's difficulties in a presidential election year.
Need for higher prices. However, Saudi Arabia and Russia still need high oil prices, at least higher than those seen in the first half of the year. Russia is supporting a significant war effort and cannot cut social spending too much. Precisely the fact of not disguising itself as a perfect democracy means that it needs greater support from public opinion than what happens in the West, where the blanket of the "rule of law" allows highly unpopular policies to be hidden.
At the same time, the military commitment is considerable, efforts are being made to reopen armaments factories that have been closed for some time (there is talk of starting to produce the T80 again, and increasing the production of ammunition ) and all this requires heavy investments. So Russia needs to increase gas and oil revenues.
Arabia finds itself in a similar situation, with important investments promised and to be made, starting frommega cities, to the development of an economy detached from oil, to the strengthening of its military position, to the need to guarantee a return to the shareholders of Aramco. All activities that require money.
Counterpressures. Obviously customers are not happy and will try to react. The United States has the option of using the NOPEC Act, which would allow citizens to sue foreign trust countries, such as OPEC and Saudi Arabia. This would threaten Aramco's listing and put Saudi investments in dollars in difficulty. However, this option would be equivalent to the use of a nuclear weapon and, as such a weapon, would be used above all for deterrent purposes.
Towards Russia the pressure would be, brutally, military, with the sending of AMRAAM air-to-air missiles, ATACMS medium-range surface-to-surface missiles and F 16s, all to burn the Russian extra profits on the field, with the side of human lives.
China may suffer indirectly from the decline in demand for its exports caused by higher energy prices, but we wrote yesterday that Russia has an eye on it. Furthermore, Beijing is investing heavily in nuclear power and is expanding into Central Asia, a potential energy supplier
The earthenware vase . In this four-way game, Arabia, Russia, China and the USA, there is an earthenware vessel that will be reduced to crumbs: Europe, especially Germany. This will be the welcome collateral victim of this war, the passerby who happened to be in the line of fire.
Price forecasts. The short-term equilibrium price (up to 6-9 months) for Brent appears to be around 80-85 dollars per barrel, with a ceiling of around 95 dollars, leaving 100 as the extreme limit, even psychological, beyond which some form of response from the USA could be triggered.
In the long term, political factors become relevant again: if this were to lead to a return of Trump (or one of his direct protégés…) to the White House, then we would have an administration that, on the one hand, would free up the oil forces and of US gas production, on the other hand it would try to rebuild good international relations if not with Russia, certainly with Saudi Arabia.
This could lead to an increase in supply and therefore a significant drop in prices, between the minimum of 45 dollars (limit for US shale production) and a maximum of around 75 dollars, profitable for everyone.
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The article What price level will Russia and Saudi Arabia find satisfactory? comes from Economic Scenarios .
This is a machine translation of a post published on Scenari Economici at the URL https://scenarieconomici.it/quale-livello-di-prezzo-verra-ritenuto-soddisfacente-da-russia-e-arabia-saudita/ on Tue, 12 Sep 2023 09:00:30 +0000.