Friday's Market Minute: Russia's Oil War

Supply-shock joined demand-shock in the oil markets this week following Russia’s departure from the OPEC+ alliance. The reverberations of the 2020 Crude Crash have been deep and wide, sending equity markets limit-down Monday and putting credit markets on edge. Russia’s decision left many investor’s scratching their heads - why would a country plummet the price of a commodity their economy depends upon? The US has become the leading oil producer in the world, but this comes not without costs - relative to Russia’s oil extraction methods, the booming US shale market is high-cost.

Russia of course knows this, and it is their present aim to inflict as much pain as possible upon US shale producers. Their strategy will work, as some small US producers will fold under these deflated prices. How long can Russia afford to keep oil at these low levels? We know oil and gas represent ~30% of Russia’s GPD, just as we know Russia’s budget demands oil at a much higher price. Economically, Russia has far more to lose than the US, where oil and gas account for only ~8% of GDP. Until Russia acquiesces to Global appeal, oil will continue its volatile ride.

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