Vladimir Putin knows America's fragile oil industry is built on a mountain of debt. So when Saudi Arabia called for production cuts to mitigate oversupply, Putin decided to pounce.
Russia shocked the world last week by blowing up its shaky alliance with OPEC. Moscow's refusal to join with the cartel is aimed in part at drowning US shale oil companies that rely on higher prices in a sea of cheap crude.
Putin's goal is to wrest market share back from American frackers, whose debt-fueled growth caused Russia to lose its title in 2018 as the world's largest oil producer.
"This is a response to try to cripple the US shale industry," said Matt Smith, director of commodity research at energy research firm ClipperData.
Russia's strategy seems to be targeting not simply US shale companies -- but the coercive sanctions policy that American energy abundance has enabled."
Oil prices crashed Monday after Saudi Arabia said it would slash oil prices, launching a ferocious response against Russia's move. US crude plummeted 26%, its worst day since 1991, to a four-year low of $31.13 a barrel.
Crude is now so cheap that many US shale companies will be forced to cut production. Bankruptcy fears are already rippling through the oil patch, sending the SPDR S&P Oil & Gas ETF(XOP) to its lowest price on record going back to 2006.
Shares of major oil companies like ExxonMobil (XOM) and Chevron (CVX), whose business models were built to withstand cheap crude, each plunged 12%. Exploration and production companies got clobbered, with Pioneer Natural Resources (PXD) down 37% and debt-riddenOccidental Petroleum (OXY)losing 52%.
The energy meltdown threatens to cause a repeat of the 2014-2016 oil crash that bankrupted dozens of American oil and gas companies and caused hundreds of thousands of layoffs. Although the industry survived, the experience proved to be very painful.
"Russia sees US shale as particularly vulnerable at the moment," said Ryan Fitzmaurice, energy strategist at Rabobank. "It is our view that Russia was targeting debt-laden US shale producers."
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