From OPEC-plus to OPEC-minus. The hit to world oil demand from coronavirus has taken its toll on the pact between Russia and Saudi Arabia, known as OPEC+, that supported oil prices above $50 and mostly near $70 a barrel for the past three years.
Cooperation between the Russians and Saudi-led OPEC came to an abrupt and acrimonious end in Vienna last Friday. Oil prices fell 9 pct on Friday and crashed 25 pct to below $34 a barrel on Monday, the biggest drop in oil prices for 30 years. (Update 9/3: View and discuss the Refinitiv Oil Research Report entitled ‘Saudi Arabia sets the stage for a high stake market share battle’, by Ranjith Raja, Oil Research Manager)
Reuters News, exclusive to Refinitiv, reported a series of market-moving headlines comfortably ahead of all other news providers. (For reporters at OPEC, it’s all about your sources. If you have to wait for a press release, you’re doomed).
World oil demand hit hard by Coronavirus, OPEC+ was expected to ratchet up its deal on supply curbs to remove an additional 1.5 million barrels a day from the 90-milllion bpd world market on top of the 2.1 million bpd of cuts already in place. It failed to agree bigger cuts. The existing curbs expire at the end of April.
Exactly what happened on Friday (6 March, 2020) has still to be reported. But there is little doubt that Moscow pulled the plug on the deal. President Vladimir Putin and his oil man Igor Sechin, CEO of Rosneft, have long worried that their production curbs were helping support the U.S. shale industry. Since Russia teamed up with Riyadh in 2017, most of the cuts by OPEC+ were replaced by more output from the Permian Basin fields of Texas. The other big U.S. shale plays, Eagle Ford and the Bakken, now plateauing because of falling prices, would be in deeper trouble without OPEC and Russian help.
Geopolitics have also shifted in the past three years. Putin and Sechin do not want to be doing favors for the U.S. oil industry, particularly after U.S. sanctions were imposed on Sechin’s company Rosneft.
Now an oil price war is underway. Saudi Arabia fired the starting gun on Saturday – announcing huge cuts to its official prices for main export grade Arab Light. Great news for it’s biggest buyers China, South Korea and India and some compensation for the economic losses because of coronavirus.
The history of cooperation on oil production, or the lack of it, suggests at least a short-term race to maximize output to take market share from your rivals. It’s all about the bottom line – measured by price multiplied by output. In times of trouble, if producers can’t agree to prop up prices by sharing the burden of output restraints, the only way to compensate is by pushing out every possible barrel. That’s fine if you can do so profitably.
But with prices falling, profitable extra production comes down to how cheaply you can pump the stuff. Saudi Arabia, by far, has the largest volume of spare supply at the cheapest cost. It’s Gulf allies the United Arab Emirates and Kuwait can also open up the taps. Other oil producers don’t have much more to pump at low prices but you can bet they will do their utmost.
The consequences could be profound. Expect straitened times for major oil companies already under huge pressure from ESG investors and the hit on oil demand from coronavirus, for the heavily indebted U.S. shale industry, for budgets and spending across oil-producing nations and a knock-on effect for industries and companies in oil-dependent regions like the Middle East.
Cheaper oil will benefit big importers like India and China and act like a tax cut for consumers, particularly in the United States where raw material costs make up a much larger share of the retail cost at the pump than in Europe. Cheap gasoline may well suit President Donald Trump heading toward a November general election under the cloud of coronavirus and it’s inevitable impact on the U.S. economy.
It won’t do him any favors in Texas but surely that is safe Trump territory. Having done oil producers — Texan, OPEC or otherwise — a huge favor by placing sanctions on OPEC members Iran and Venezuela, might he be tempted to double down on Russia’s Rosneft to help temper the worst of the oil price decline?
Saudi and Russia joined forces to support oil prices at the end of 2016 after Saudi’s pump-at-will policy had failed to do much damage to the U.S. shale industry. Three years later, will a new price war squeeze out shale or force Russia and the Saudis back to the table?
Attention now turns to who will blink first. Russia is in a stronger financial position than three years ago relative to Saudi – holding about $80 billion more in reserves than Riyadh – and so better placed to weather a price war. While the Saudi riyal is pegged to the U.S. dollar, Russia’s flexible currency means budget break-even requires about $40 a barrel compared to over $80 for Saudi Arabia. That makes it unlikely Moscow will blink first. Saudi Arabia and OPEC may need to go it alone if they want to rescue the oil market.
How to track the developments:
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- Watch our unique series of video insights covering various sectors and asset classes. entitled the #CoronaCorrection Series, jointly produced with Real Vision.
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- View and discuss the Refinitiv Oil Research Report (9 March 2020) entitled ‘Saudi Arabia sets the stage for a high stake market share battle’, by Ranjith Raja, Oil Research Manager
- Listen and review the webcast recording of our client webinar with Dr. Richard Peterson, MarketPysch’s CEO and Refinitiv’s Richard Goldman Market Development Director, Quant and Feeds, who presented Refinitiv’s research and insights on the current pandemic; reviewing the impact across different sectors in APAC.