Page 4 - MEOG Week 16

MEOG CommentaRy MEOG
Russia and
Saudi consider
even deeper cuts
Russia and Saudi Arabia may be ready to enact deeper oil production cuts to stabilize prices, the energy ministers of the two countries said in a joint statement.
saudi aRabia
What:
Russia and Saudi Arabia are likely to have to consider deeper oil production cuts.
Why:
The recently agreed cuts do not match the drastic fall in worldwide oil demand.
What next:
Hopes for a pickup in demand rely on a cure for the coronavirus, which seems a long way off.
ThE two countries will “continue to closely monitor the oil market and are prepared to take further measures jointly with OPEC+ and other producers if these are deemed necessary,” the statement said as quoted by Bloomberg.
Last week, OPEC+ agreed to take 9.7 million bpd of oil from the market, with the cuts begin- ning next month and remaining in effect until the end of June, after which the group will start to ramp up production gradually.
From 9.7 million bpd in May to June, the cuts will decline to 7.7 million bpd for the period July to December 2020, and then further to 5.8 mil- lion bpd until the end of April 2022.
Crucially, demand has continued to fall sharply because of the Covid-19 pandemic. Oil consumption in the United States alone has fallen by a third, according to Reuters. Even though there is talk about reopening the econ- omy, this will most likely happen gradually, as in Europe, and it will be at least a few months until demand begins to recover in any meaning- ful way.
Meanwhile, oil inventories have been filling up. The federal U.S. government was reported to be negotiating leasing space in the Strategic Petroleum Reserve to nine oil companies that
have nowhere else to store their unsold and tem- porarily unsellable crude.
In this context, it is hardly a surprise that the effect the OPEC+ production cut announce- ment had on prices was muted, with most trad- ers appearing to believe it is not deep enough, even with the additional cuts to be implemented by non-OPEC+ producers. A cut of 20 million bpd is being mentioned as the required size of total reductions, and yet demand decline this quarter is seen at some 30 million bpd.
Russian roulette
The Kremlin may have ended its oil war with Saudi Arabia, yet the pain of crude’s crash is only just starting to hit Russia’s budget.
Next month, the nation’s coffers will get less than $1 for each exported barrel of oil, accord- ing to Bloomberg calculations based on the data from the Russian Finance Ministry. Oil export duty in May is set to tumble by 87%, compared to April, reflecting crude’s biggest crash in a generation. “This duty level is the lowest since 2002 when the new export duty mechanism was introduced,” a representative from Russia’s Finance Ministry told Bloomberg.
The average price for Urals, the nation’s main
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w w w . N E W S B A S E . c o m Week 16 22•April•2020