Could the world really unite to boost the oil market?

Donald Trump’s claim that oil producers are going to make big cuts in output has helped propel crude prices back above $30 a barrel, from an 18-year low. Brent, the international benchmark, is up 35 per cent over the past two days.

Saudi Arabia, meanwhile, has convened an emergency meeting of the expanded Opec+ group, which includes Russia, in an indication that it could be ready to end the price war that has contributed to the halving of oil prices in the last month.

But analysts wonder whether a global deal can really be done — and whether it will make much difference to the outlook for the market, in the face of coronavirus.

What is on the table?

Mr Trump, the US president, claimed there was a deal between Saudi Arabia and Russia to cut oil supplies by 10m to 15m barrels a day. That would be by far the biggest cut in the history of Opec. 

Opec+ is preparing to meet on Monday — online — and with coronavirus having helped to push oil demand down by as much as a third, or more than 30m barrels a day, there is a strong incentive to reach some sort of agreement.

The oil industry has never faced a collapse in demand of the magnitude inflicted by this disease, and is ill-equipped to cope. While production remains rampant, storage tanks could be filled within weeks, forcing a disorderly and damaging shutdown of production. 

US shale oil producers have been particularly hard-hit. Whiting Petroleum, a Denver-based group, declared bankruptcy this week. Yields on bonds issued by rival producers have soared, as investors expect more to go bust.

That has led to a prospect that was once unthinkable — the US partaking in some form in a co-ordinated cut with rival producers. 

Line chart of $ per barrel showing Oil rises as Trump talks up chances of Russia-Saudi pact

What is the US position?

It is far from straightforward. Antitrust law in the country will restrict the ability of companies to work together to reduce production, even if enough of them wanted to. Many in the industry, especially majors such as ExxonMobil, are deeply opposed to co-ordination, both for ideological and economic reasons.

But it is clear that — deal or no deal — US oil production is likely to fall. Prices are a long way below the level that shale producers need to break even, and the infrastructure of pipelines and storage tanks is quickly becoming overwhelmed. Companies are also cutting spending, which will naturally lead to a drop in production.

There could, therefore, be a temptation to formalise this eventual drop in output as the US contribution to a global supply deal. Even if prices rise quickly, US producers as a whole would remain under pressure, as they need at least $45 a barrel to break even.

The Railroad Commission of Texas, which regulates the oil and gas industry in the biggest energy-producing state, has held talks with Opec secretary-general Mohammad Barkindo. RCT chief Ryan Sitton has described proportionate production cuts in the state — which were relatively commonplace half a century ago — as a “bargaining chip we can bring to the table”. 

Mr Sitton told the Financial Times that Mr Barkindo invited him to the Opec+ meeting, though it is unclear if anyone will represent the US at the talks.

Mr Trump is due to meet US oil companies on Friday afternoon.

Could a deal raise prices?

Yes it could, but probably not by much. An agreement is likely to be aimed at averting a further collapse in prices, rather than boosting them significantly.

Rystad Energy’s Per Magnus Nysveen said a cut of about 10m b/d would give the oil industry “room to prepare” for shutdowns that would be forced anyway once storage ran out. 

“This will give sufficient time for the rest of the producers to adapt,” said Mr Nysveen. “The market could balance at prices higher than $30 a barrel, rather than a complete collapse [to] around $10 or even lower.” 

Not all traders are convinced. The scale of the drop in demand means a deal may just delay the inevitable. A lot rests on the pandemic. If lockdowns look like they will stretch into the summer, the impact of any cut might fade quickly.

“If you lose 30m b/d of demand at some point you’re going to need to lose roughly the same amount of production,” said one trader.

Is Russia going to play ball?

It was Moscow’s decision to walk away from an offer to make deeper production cuts in early March that prompted Riyadh to launch the price war.

But a month on, has Russia had a change of heart? There are reasons to think it is strongly tempted. Every producer faces ultra-low prices and the threat that at some stage it will need to lower output anyway. Already, Russia is struggling to place all its crude into the market.

Russian president Vladimir Putin said on Friday afternoon that he would welcome joint action to stabilise oil markets, saying any cut should be around 10m b/d and that he would like the US to participate. 

The comments represent a swift change in direction for Moscow. Igor Sechin, the head of state oil champion Rosneft and close ally of Mr Putin, has long opposed co-operation with Opec, and had hoped that a price war would damage the US shale industry that has won market share from other producers in recent years. 

Mr Putin on Friday indicated he believed it was Saudi Arabia that wanted to pressure the US shale industry — a comment that may be viewed as provocative in Riyadh, given its close ties to Washington. 

Saudi Arabia started this. Will it finish it?

Riyadh launched the first salvo in the price war a month ago when it slashed its oil prices and announced it was raising supplies. It has insisted it will not cut again unless others do so. But under US pressure — and with its international reputation suffering — it could be ready for a truce.

The kingdom has one of the lowest costs of production in the world, but it is far from immune to collapsing oil prices. The demand crash means it will struggle to sell its crude, however cheaply.

And as Saudi Arabia battles its own coronavirus crisis it may have been stung by the criticism that it has helped destabilise the global economy, and limited the ability of Opec members such as Nigeria and Iraq to fund their own responses to the virus.

Crucially, Saudi Arabia’s key western ally remains the US — and especially Mr Trump. With November’s presidential election on the horizon Riyadh may fear what a Democratic victory would mean for relations with Iran, its main regional rival.

Mr Trump has issued thinly veiled threats suggesting he could retaliate against the kingdom if it does not agree to a deal. Shale companies have lobbied him for an aggressive response, including a suspension of military aid to the kingdom.

Ultimately the collapse in demand could force Riyadh’s hand.

“One way or another, oil supply from Saudi Arabia was about to fall because there is no demand for it,” said Olivier Jakob at PetroMatrix, a consultancy. “In the end, for Saudi Arabia, it is better to cut supply by portraying that it is in control.”

Additional reporting by Derek Brower and Anjli Raval in London, Henry Foy in Moscow

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