On April 2nd, US President Donald Trump’s announcement that Moscow and Riyadh would alleviate pressure on the oil market led to a 46.7% jump in the price of Brent crude.
Finally, it settled at $29.94, which is a 21% gain, which is also massive.
Trump said Crown Prince Mohammed bin Salman of Saudi Arabia and Russian President Vladimir Putin had begun talks on how to curb production by as much as 15m barrels a day — a large chunk of the world’s oil demand, which stood at 100m b/d last year.
“I expect & hope that they will be cutting back approximately 10 Million Barrels, and maybe substantially more which, if it happens, will be GREAT for the oil & gas industry!” he said. “Could be as high as 15 Million Barrels. Good (GREAT) news for everyone!”
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 cutting back approximately 10 Million Barrels, and maybe substantially more which, if it happens, will be GREAT for the oil & gas industry!
— Donald J. Trump (@realDonaldTrump) April 2, 2020
After Trump’s announcement, Saudi Arabia’s state news agency said the kingdom was calling for an emergency meeting of Opec and other oil producer nations, including Russia.
It said it sought to reach a “fair” supply deal, but it didn’t commit to any other actions.
The Kremlin spokesperson Dmitry Peskov said that Russian President Vladimir Putin and the Crown Prince hadn’t spoken.
“There was no conversation” between Putin and Mohammed bin Salman, Peskov said.
“So far, no one has started talking about any specific or even abstract deals in exchange for Opec+,” he said.
Russian energy minister Alexander Novak said that he did not “exclude the option of negotiations” with Saudi Arabia, but that the collapse in demand meant that cuts to supply would not necessarily prevent further oil price falls.
Ryan Sitton, a Texas state regulator, somehow made his way into oil diplomacy and said that he had a conversation with Russian Energy Minister Alexander Novak, and he would speak to Saudi Prince Abdulaziz bin Salman, as well.
Just had a great conversation with Russia’s @novakav1. While we normally compete, we agreed that #COVID19 requires unprecedented level of int’l cooperation. Discussed 10mbpd out of global supply. Look forward to speaking with Saudi Prince Abdulaziz bin Salman soon.
— Ryan Sitton (@RyanSitton) April 2, 2020
Sitton had an entire 1-hour-long presentation explaining the situation, and how he planned to tackle it, more or less.
It is unclear how a local official will influence the entire situation, but it remains to be seen.
Helima Croft at RBC Capital Markets said: “There is a realisation in Washington that the path to a deal runs through Moscow. Everyone knows that Saudi Arabia wants Russia at the table but there is also a recognition that the US will have to participate in some way. But there are clear questions about what the US’s involvement will look like.”
Meanwhile, in the US it appears that shale companies are realizing that the root of the issue isn’t Moscow, but rather Riyadh and are lobbying for a push against the Kingdom.
Among the shale industry proposals are preventing Saudi crude from reaching the kingdom’s large Motiva refinery in Port Arthur, Texas; tariffs on foreign oil; or suspending the Jones Act, which helps make crude shipped by domestic suppliers more expensive than oil delivered on foreign tankers.
“Plan A is getting Saudi Arabia and Russia to talk and cut. But if that takes too long or fails, the president will resort to plan B — protectionist measures to assist domestic producers,” said Bob McNally, head of consultancy Rapidan Energy Group and a former White House adviser.
Others, however, are calling for both Russia and Saudi Arabia to be investigated for oil price manipulation, such as Harold Hamm, chairman of shale producer Continental Resources.
— OilPrice.com (@OilandEnergy) April 1, 2020
The Riyadh-initiated price war, is detrimental to both Russia and Saudi Arabia, but could also be lethal to the shale industry in the US.
In the last four years, shale has come under the control of the financial sector, which heavily invested in companies without any sustainable competitive advantage in the global oil market.
For example, there was heavy investment in companies producing “light” grades of oil that are not required in the US local market nor are they required for exports as massive volumes of these grades are available on the market already.
Therefore, most of the “new” oil-producing companies in the US are highly over-valued, while proving low covering assets.
The claim of US “energy independence” appears to have pushed authorities, Wall Street investors, banks and funds into chasing uneconomical investments.
They then demand additional investments and further expansion, which in turn required even more capital to cover the deep ongoing losses.
For Russia, oil exports contribute to 21 percent of Russia’s GDP, according to the estimates from CREON Energy, while in Norway this figure is 32 percent.
Therefore, the consequences of oil price collapse will be no more dramatic for Russia than it will be for other major oil-producing countries.
However, it is important to understand that Russia was neither technically nor contractually able to match the ‘surprise cut’, Saudi Arabia went ahead with its contingency plan and presented Russia as the antagonist in what is today referred to as a “price war”.
Furthermore, Russia has no interest to undermine its own prices, and supplies, as the COVID-19 pandemic is still full-fledged and just in its early phases in most places on the planet, meaning that the peak (and worst is yet to come).
MORE ON THE TOPIC:
- Trump Says Saudi Arabia, Russia Will Cut Back On Oil Production
- U.S., The Kingdom And Russia To Negotiate Potential End Of Oil Price War