Russian oil market collusion! Quick, call Robert Mueller out of retirement! Call Rachel Maddow! Open an investigation in the House!
That “very important” call President Trump had during a live interview with Fox & Friends with Vladimir Putin of Russia may have had some impact on oil prices. Crude is now over $30 again for June and other futures contracts.
This week was supposed to be the beginning of the end to the OPEC+Russia agreement to curtail oil production in a low-demand environment. The deal was mainly a Saudi Arabia – Russia deal, and has been in the works for at least three years, mostly in a response to competition from U.S. shale oil and gas producers.
A month ago, the two banged heads and disagreed to cut production. That meant both the Russians and the Saudis would be producing more oil precisely at a time when a global pandemic has put the world’s core economies on pause.
Saudi Arabia called for an urgent OPEC+ meeting, largely out of fears that storage units would have no space left for all the oil they’re producing and not selling, leading to the potential of free oil. What else where they going to do with it?
Russian companies have now indicated a willingness to pitch in with production cuts shortly after a talk between Presidents Donald Trump and Putin.
“The about-face is not surprising,” says Amarpreet Singh, an oil analyst for Barclays in New York. Political intervention seemed likely out of Washington, worried that its allies the Saudis were trying to crush American shale producers at a time when the country is fighting a pandemic.
There are some uncertainties about the participation of non-OPEC members in production talks, meaning the U.S., but the magnitude of the current demand shock means the world’s biggest oil and gas producers will have to come together, a sort of OPEC++ perhaps.
Russia and the U.S. are not members of the oil cartel, led by the Saudis.
If the group agrees to a 2 million barrel per day reduction in supplies from the March baseline level, that would reduce forecast imbalances by about 30%, stabilizing oil prices and suggesting oil company stocks are down crashing for now.
Saudi Arabia is finding it difficult to secure buyers for some of its supplies — namely China — even after offering them steep discounts.
Russia’s Urals grade oil is now trading at a discount of more than $15 barrel to Brent oil, the European benchmark.
In the current scenario, the net per-barrel price tag is below the cash cost of production, which cannot be offset by higher sales volumes or lower currency exchange rates if no one is buying the stuff.
“We expect OPEC+ producers to collaborate, as market share preservation in the current environment seems both futile and short-sighted,” says Singh.
U.S. oil production growth was slowing even before the pandemic.
Shale producers are not overspending anymore out of fear of going bust. The weighted average breakeven oil price for the Permian, Bakken, and Eagle Ford shale patches is about $50 a barrel, per Barclays estimates.
Non-US supplies have been picking up of late, and fewer new projects are coming online here because of lower prices. These trends should lead to a more sanguine outlook for OPEC and Russia once demand recovers, says Singh.