Too Little Too Late? Russia And Saudi Arabia Reach Truce In Oil Price War


A flame burns from a stack at the oil processing facility at Saudi Aramco’s Shaybah oil field in the … [+] Rub’ Al-Khali desert, also known as the ‘Empty Quarter,’ in Shaybah, Saudi Arabia, on Tuesday, Oct. 2, 2018. Saudi Arabia is seeking to transform its crude-dependent economy by developing new industries, and is pushing into petrochemicals as a way to earn more from its energy deposits. Photographer: Simon Dawson/Bloomberg

© 2018 Bloomberg Finance LP

OPEC+ leaders Saudi Arabia and Russia arrived at an historic crude production cut late Thursday, effectively halting a bitter oil war which saw prices implode by more than 50% from January highs. Details from the virtual OPEC+ conference have just emerged:

  1. Members will adjust downwards their overall crude oil production by 10.0 mb/d, starting on 1 May 2020, for an initial period of two months that concludes on 30 June 2020. For the subsequent period of 6 months, from 1 July 2020 to 31 December 2020, the total adjustment agreed will be 8.0 mb/d.
  2. To be followed by a 6.0 mb/d adjustment for a period of 16 months, from 1 January 2021 to 30 April 2022.
  3. The baseline for the calculation of the adjustments is the oil production of October 2018, except for the Kingdom of Saudi Arabia and The Russian Federation, both with the same baseline level of 11.0 mb/d.
  4. The agreement will be valid until 30 April 2022, however, the extension of this agreement will be reviewed during December 2021.

The U.S. shale patch has been rooting for such an agreement, which ideally would cut supply, raise prices, and toss a lifeline to an industry that has been buffeted by catastrophically low prices. President Trump pushed for a 10-15 million bpd OPEC production cut personally in an April 2nd phone call with Russia’s Vladimir Putin and Crown Prince Saudi Arabia Mohammed bin Salman. It seems OPEC listened.


Russian President Vladimir Putin (L) shakes hands with Saudi Deputy Crown Prince and Defence … [+] Minister Mohammed bin Salman during a meeting at the Kremlin in Moscow on May 30, 2017. / AFP PHOTO / POOL / Pavel Golovkin (Photo credit should read PAVEL GOLOVKIN/AFP/Getty Images)


But the levels announced may fail to shock the prices back into the economically acceptable range for the producers. An organized output cut of this magnitude is unprecedented, yet even 10 million bpd maybe insufficient to balance today’s markets.

Both Russia and Saudi Arabia are vitally interested in higher prices to balance their budgets and minimize digging into their currency reserves. At the current price rate Russia can last 5-7 years and Saudi Arabia no more than 3 years, as crude accounts for 80% of the Kingdom’s government revenue.

For Russia this agreement represents a policy failure. Their refusal to join KSA-proposed output curbs in March was intended to punish the U.S. shale patch and flex its muscle as a global top 3 producer. By not cutting when it needed to, Russia now will cut much more. Moscow incited a price war that sent oil prices plummeting (along with the value of the ruble).

Demand destruction in the wake of the global Coronavirus, as airplanes stop flying, and workers stop commuting, is beyond what anyone could have imagined. The lockdown is estimated to remove between 15 million bpd and 35 million bpd of demand for 2Q2020, or roughly one third of typical daily consumption levels. If the high-end scenarios of 35 million bpd demand is lost, oil producers will need to find space for 1 billion barrels of oil in just one month’s time. That’s more than the entirety of onshore and floating storage available globally (~900 million barrels). 

If stores reach maximum capacity, there’s an unlikely but real chance oil producers will need to pay for customers to offtake their crude – sending oil prices negative. The fact that we are discussing this possibility a mere three months after Brent was in the mid $70 range is a testament to the catastrophic impact of Covid-19 on energy markets.

Wall Street Reacts to OPEC News

In the wake of Thursday’s initial announcement traders did not respond well. As of market close on April 9, WTI futures were down 7.61% on the day to $23.19, with Brent crude losing 2.95%, closing at $31.87. Certainly this is not the response that OPEC+ was hoping for.


Year-to-date Brent and WTI crude oil futures.

The Wall Street Journal

Dr Carole Nakhle, Founder and CEO of Crystol Energy, had this to say about the current OPEC negotiations:

“The current prospective deal between Russia and Saudi Arabia, and more broadly between OPEC and OPEC+ may not be sufficient. Demand destruction may be 30 million bpd (mbd). The numbers published Thursday April 9 suggest 1.6 mbd for Russia and 3 mbd cut for Saudi – this may not be enough.

More broadly, the clash between Moscow and Riyadh reflects internal differences: Saudi is one locus of decision making. In Russia there are a number of private and state run companies and financial institutions. It takes longer to arrive at decisions.”

With President Trump refusing to officially participate in the OPEC+ output curb (he rightly points out that free markets will naturally cut U.S. oil production), the current agreement will at most provide some storage relief for producers, but will not be adequate to balance the market.

Talks will continue today, Friday April 10, at the G20 where OPEC+ energy ministers hope to elicit the support of other key oil producing nations such as the U.S. and Canada.

With Assistance from James Grant

Continue reading at Forbes