Page 4 - FSUOGMWeek 10 2020

FSUOGM COMMENTARY FSUOGM
Russia, Saudi Arabia lock horns in zero-sum supply war
The supply war comes against the backdrop of the COVID-19 crisis, which looks set to wipe at least 2mn bpd off global oil demand
RUSSIA
WHAT:
Russia has refused to back future OPEC+ cuts, initiating a supply war with Saudi Arabia.
WHY:
Moscow sees the production pact as ineffective, simply serving to prop up US shale producers.
WHAT NEXT:
COVID-19 has weighed down on demand, locking Russia and Saudi Arabia in a zero-sum game
that may achieve little besides damaging their economies.
RUSSIA refused to back Saudi Arabia’s proposal for deeper OPEC+ cuts to oil production on March 6, effectively firing the first shot in what could be a costly and prolonged war for market share.
The confrontation between the world’s sec- ond and third-biggest oil producers comes against the backdrop of the COVID-19 crisis, which looks set to wipe at least 2mn barrels per day (bpd) off global oil demand. Producers the world over will have to adjust to this new bearish price environment.
Russia vs Saudi Arabia
Saudi Arabia had wanted the OPEC+ alliance of producers to extend an existing cut of 2.1mn bpd beyond March, and also take an additional 1.5mn bpd of supply offline. Russia opposed both proposals, and talks broke down. Saudi Aramco responded by cutting its export oil prices by almost 10% on March 7, while also pledging to ramp up production, in order to flood the market. Its goal appears to be to bring Russia back to the negotiating table.
Oil prices and stocks plunged on March 9 as traders responded to the collapse in OPEC+ talks and the worsening economic impact of COVID-19. Brent crude futures fell by a third in early trading to just above $31 per barrel, while US West Texas Intermediate (WTI) bottomed out at $27.35. Prices have since recovered some- what, with Brent trading at $36.80 at 07:40 GMT on March 11, and WTI at $33.95.
Saudi Aramco CEO Amin Nasser announced on March 10 that the kingdom would restore its oil supply to 12.3mn bpd in April, after existing OPEC+ quotas expire. Riyadh has maintained output at only 9.7mn bpd during the last couple of months. The Saudi government upped the anti on March 11, promising to increase production to 13mn bpd.
Russia, meanwhile, could bring on stream an extra 250,000 to 300,000 bpd of oil in the short term, and up to 500,000 bpd at a later stage, Rus- sian Energy Minister Alexander Novak said on local television on March 10. Its output averaged 11.29mn bpd in February, up from an average of 11.25mn bpd during 2019.
Sources told Bloomberg on March 9 that Rus- sia’s national oil company (NOC) Rosneft alone could boost output by 300,000 bpd within a week or two of the OPEC+ agreement expiring, having fully prepared for any scenario. The company has a raft of greenfield projects which it has inten- tionally delayed because of OPEC+ quotas that can now move forward.
Russia, Saudi Arabia and other OPEC and non-OPEC producers reached a landmark deal in late 2016 to cut production to bolster oil prices. But Moscow has grown increas- ingly weary of continued co-operation with its OPEC+ partners. One of the most vocal oppo- nents of the OPEC+ alliance has been Rosneft CEO Igor Sechin. Sechin argues that by restrict- ing its production, Russia has simply allowed US shale drillers to thrive.
The OPEC+ alliance had some initial suc- cess in driving up oil prices. But benchmarks stubbornly remained at around $60-65 per bar- rel last year, barring brief spikes on geopolitical uncertainty. The group’s efforts to rebalance the market were undermined by rising production from the US and other producers not party to the pact. After venting its growing frustration, Russia secured a key concession from OPEC+ in December: its condensate output would be exempted from its cuts quota. But even this was not enough to convince Moscow to stay on board.
Shares in Russia’s top oil and gas producers tanked on March 9 after the collapse in OPEC+
Aramco wants to flood the market to bring Russia back to the negotiating table.
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w w w . N E W S B A S E . c o m Week 10
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