Page 10 - MEOG Week 10

MEOG PoLICy MEOG
maximum pain
The shock-and-awe Saudi strategy could be an attempt to impose maximum pain in the quick- est possible way to Russia and other producers, in an effort to bring them back to the negotiat- ing table, and then quickly reverse the produc- tion surge and start cutting output if a deal is achieved.
By 8 March Brent crude futures were down by more than 27% at $35.5 a barrel by 1340 GMT, after early dropping by as much as 31% to $31.02, their lowest since Feb. 12, 2016. U.S. West Texas Intermediate (WTI) crude fell by more than 27%, to $32.30 a barrel, after initially falling 33% to $27.34, also the lowest since Feb. 12, 2016.
Russia, one of the world’s top producers alongside Saudi Arabia and the United States, also said it could lift output and that it could cope with low oil prices for six to 10 years.
The International Energy Agency said on Monday oil demand was set to contract in 2020 for the first time since 2009. It cut its annual fore- cast by almost 1 million bpd and that the market would now contract by 90,000 bpd.
What happens next?
At first glance, this looks like a battle between Russia and Saudi over oil policy. But the context of the relentless rise in US oil production over the past ten years is also an important factor.
Both Russia and the major OPEC producers have been openly annoyed with the refusal of the US producers to participate in past produc- tion cuts and the fact that the US industry has been the major beneficiary of the price support mechanisms. It is a stretch to say that Moscow and Riyadh are in any sort of cooperation to try and reduce US oil production but if a price war results in some US casualties and a greater
reluctance by investors and lenders to fund future US marginal production, then Moscow and OPEC will be relieved.
The oil price and oil producers will inevitably endure a bloody few months at least.
President Putin will not want to start scaling back budget spending, especially for the flagship national projects programme, a very ambitious $400bn programme to transform the economy and people’s living conditions by the end of his presidential term in May 2024.
He will also not want to scale back on the promised social programmes and family sup- ports that were a big part of his Federal Assembly Address in January; especially not as public trust in his leadership has fallen to 35%, from 60% only two years ago.
If the oil price is still trading in, for example, the $20 to $30 per barrel range in the summer, then this may change. Putin will be just as reluc- tant to run a big budget deficit or to reduce finan- cial, reserves to a low level. That would leave the country vulnerable to future sanctions.
The hope in both Moscow and Riyadh is probably that either is forced to blink first and return to the negotiating table. The ideal sce- nario for both is that the marginal or high-cost oil producers quickly feel the pain and are forced to shutter production. It really is a waiting game and a test of both political nerve and financial reserves.
It is moot point whether these moves by Saudi Arabia – with the resulting low oil prices and financial hit – will outweigh the perceived bene- fit of landing a blow on the US shale industry and lead to a Russian return to the OPEC negotiating table. But it does appear that Russia and Presi- dent Putin are in a better position to fight this war than is Saudi Arabia or its Crown Prince.™
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w w w . N E W S B A S E . c o m Week 10 11•March•2020