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FSUOGM COMMENTARY FSUOGM
Trump signals Russia-
Saudi truce
Russia has the upper hand in negotiations with Saudi Arabia
RUSSIA
WHAT:
The world’s leading producers will hold talks on April 9, raising hopes that a deal will be reached to rebalance supply and demand.
WHY:
The agreement is seen as vital to prevent oil prices from sliding further. But the proposed supply
cut will not make up for the loss of demand as a result of COVID-19 lockdowns.
WHAT NEXT:
Russia can outlast Saudi Arabia in a price war, and therefore has the upper hand in negotiations.
US President Donald Trump announced on April 2 that Russia and Saudi Arabia would be cutting their output, instead of continuing with a supply war that could result in hundreds of oil firms across the world going out of business.
“Just spoke to my friend MBS (Crown Prince) of Saudi Arabia, who spoke with President Putin of Russia, & I expect & hope that they will be cut- ting back approximately 10 million barrels, and maybe substantially more which, if it happens, will be GREAT for the oil & gas industry,” Trump tweeted. “....Could be as high as 15 million bar- rels. Good [GREAT] news for everyone!”
Traders were encouraged by the news, with Brent surging 16% to $29.11 per barrel and West Texas Intermediate (WTI) leaping up 20% to $24.40 per barrel after Trump released his tweet.
Trump was characteristically lacking in clar- ity, failing to specify what timeframe the claimed 10-15mn barrel cut related to. However, Ryan Sitton, the head of the Texas Railroad Commis- sion, responsible for energy regulation, tweeted later on April 2 that he had discussed a 10mn bpd cut with Russian Energy Minister Alexan- der Novak.
“While we normally compete, we agreed that COVID-19 requires an unprecedented level of int’l cooperation,” he said. “Discussed 10mn bpd out of global supply. Look forward to speaking with Saudi Prince [and Energy Minister] Abdu- lazizbinSalmansoon.”
Russia produced 11.3mn barrels per day of oil and condensate in March, according to energy
ministry data, whereas Saudi Arabia ramped up its output to the 12mn bpd threshold on April 1 for the first time. Removing anywhere near 10mn bpd of supply would be unthinkable for the pair. But it is likely, as Sitton suggests, that Trump was referring to a global cut involving other producers as well.
Moscow initially downplayed making any commitments to cut output. But after chairing a meeting with Russian energy officials and oil company heads on April 3, Russian President Vladimir Putin suggested that a 10mn bpd reduction – shared between Russia and the rest of OPEC+ as well as other producers – would be needed to rebalance the market. This restric- tion would need to remain in force for several months, he said.
In any case, the lockdown consequences of the coronavirus (COVID-19) pandemic could wipe as much as 16mn bpd off global demand for fuel this month, Norwegian consultancy Rystad Energy estimated in a recent note. If this occurs, the proposed cuts would not be enough to level supply with demand.
Trump under pressure
Trump initially welcomed the collapse of OPEC+ talks in early March, saying the slump in oil prices would be good for US consumers. Trump has shifted position in recent weeks, becauseoftheimpactlowpriceshavehadonthe US shale industry, which is heavily indebted and saddled with much higher breakeven costs than
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w w w . N E W S B A S E . c o m Week 14 08•April•2020