Page 6 - FSUOGM Week 16

FSUOGM COMMENTARY FSUOGM
Russia and Saudi Arabia consider
even deeper oil output cuts
Russia and Saudi Arabia may be ready to enact deeper oil production cuts to stabilise prices
RUSSIA
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.
RUSSIA and Saudi Arabia 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 nec- essary,” the countries’ energy ministries said in statements.
Last week, OPEC+ agreed to take 9.7mn bar- rels per day of oil off the market, with the cuts beginning next month and remaining in effect until the end of June, after which the group will start to ramp up production gradually.
From 9.7mn bpd in May to June, the cuts will decline to 7.7mn bpd for the period July to December 2020, and then further to 5.8mn bpd until the end of April 2022.
Crucially, demand has continued to fall sharply because of the coronavirus (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 economy, 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 US federal government was reported to be negotiating leasing space in the Strategic Petroleum Reserve (SPR) to nine oil companies that have nowhere else to store their unsold and temporarily unsellable crude.
In this context, it is hardly a surprise that the effect the OPEC+ production cut announcement
had on prices was muted, with most traders appearing to believe it is not deep enough, even with the additional cuts to be implemented by non-OPEC+ producers. A cut of 20mn bpd is being mentioned as the required size of total reductions, and yet demand decline this quarter is seen at some 30mn 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 price for Urals, the nation’s main export blend, averaged just over $19 a barrel between March 15 and April 14, according to the Finance Ministry.
The oil production tax, the so-called MET, is based on a monthly average Urals price, and is also declining sharply. While the level for April is yet to be determined, the March one, based on the Urals price of $28.95, reached just $6.70 per barrel, which is the lowest since January 2016.
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w w w . N E W S B A S E . c o m Week 16 23•April•2020