Page 6 - LatAmOil Week 14 2020

LatAmOil COMMENTARY LatAmOil
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“Discussed 10mn bpd out of global supply,” he added. “Look forward to speaking with Saudi Prince [and Energy Minister] Abdulaziz bin Salman soon.”
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 involv- ing other producers as well.
Moscow initially downplayed making any pledges to cut output. But after chairing a meet- ing with Russian energy officials and oil com- pany heads on April 3, 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 rebal- ance the market. This restriction 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- plus talks in early March, saying the slump in oil prices would be good for US consumers. Trump has shifted position in recent weeks, because of the impact low prices have had on the US shale industry, which is heavily indebted and saddled with much higher breakeven costs than either Russia or Saudi Arabia.
America’s first big shale producer went bust this month, putting pressure on Trump from the domestic oil and gas industry to do something. Whiting Petroleum, one of the largest compa- nies developing the Bakken formation in North Dakota, filed for protection against creditors, asking them to convert $2.2bn of debt into a 97% stake in the company.
The alliance’s previously agreed supply quo- tas expired on April 1, allowing Russia, Saudi Arabia and others to pump as much as they please. Backed by the US oil lobby, Trump’s administration has intervened to try to resolve the dispute. Washington will be using diplomacy with Riyadh, which remains one of its strongest allies in the Middle East. With Russia, on the other hand, it is likely to be employing sanctions as leverage. Washington may be promising to scale back existing sanctions in return for Russia changing course, or threatening to impose new measures if Moscow fails to comply, or both.
It is unclear whether such a carrot or stick approach would work. But US shale drillers need oil prices to rise, or many risk going under.
What next?
OPEC-plus was understood to have planned to meet on April 6 to discuss their co-operation,
but this has been rescheduled to April 9, the Kremlin has said. All members of the groupd are expected to take part in the meeting, which will be held as a video conference, as well as addi- tional producers.
“The sticking point is how much each pro- ducer is willing to cut,” Rystad says. If Moscow and Riyadh fail to break the deadlock, “Saudi Arabia will suffer a [bigger] hit than Russia in all five financial criteria we examine: the impact on oil and gas revenues, fiscal breakeven price, fis- cal deficit and foreign currency reserves, budget deficits and domestic policy,” the consultancy estimates.
Assuming Brent averages $34 per barrel this year and $44 next year, Saudi Arabia’s reve- nues will halve in 2020 – a loss of $105bn – and will then recover by 30% to almost $135bn in 2021, according to Rystad. At $20 per barrel oil, Riyadh will lose up to $150bn this year, even when the increase in production is taken into account.
Russia will similarly suffer a 47% slump in 2020 revenues to around $84.5bn, rising 35% to $114bn in 2021, at $34 per barrel oil. At $20 oil, it would see a $110bn shortfall in 2020. Rus- sia would hold up better than Saudi Arabia at this lower price, especially as gas contributes a greater share of its overall revenues.
Despite efforts to streamline its budget, Saudi Arabia’s fiscal breakeven price remains high at $84 per barrel. In contrast, Russia’s breakeven point has fallen from $114 in 2013 to nearly $42 per barrel in 2020, largely owing to a weakened RUB-USD exchange rate.
Other Middle Eastern countries have more to lose from the price war, with Iran already struggling with political instability and US sanctions. Its fiscal breakeven point this year is a towering $195 per barrel. Kuwait and the UAE also need higher prices to keep their economies going without extra borrowing.
Saudi Arabia is anticipated to incur a fiscal deficit of 7% this year, whereas Russia has man- aged to balance the books in recent years. Mos- cow also has larger foreign reserves than Saudi Arabia, having amassed around $550bn.
Rystad predicts that Saudi Arabia could face a budget deficit of over $100bn this year, whereas Russia will incur a relatively smaller deficit of $39bn. Russia’s finance ministry has expressed confidence, saying the country can withstand $25-30 per barrel oil for six to ten years.
In addition, Russia benefits from the free floating ruble, which enables authorities to quickly adjust to changing market conditions via devaluations. A weaker ruble also boosts government revenues from exports.
“Evidently, Russia is the most well-positioned country in this oil-price war, but someone will have to budge, as the global petroleum industry is already taking a hit from COVID-19,” Rystad says. “The longer the volume war goes on, the more long-term implications we will see for all involved.”
All this suggests Russia will have the upper hand in talks on April 9. ™
“ is how much
The turning point
each producer is willing to cut
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Week 14 09•April•2020