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Why Didn’t Russia Just Cut Oil Production

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Last week OPEC conducted meetings with a coalition of partners that have worked together to limit oil production since 2016. It was widely reported that the group hoped to come to an agreement to reduce oil production by an additional 1.5 million barrels per day (BPD).

The meetings came in the wake of reports from the IHS Markit Crude Oil Market Service that Q1 2020 world oil demand will decline by 3.8 million BPD from a year earlier. This will represent the largest quarterly demand decline ever reported.

But this time one of the key partners of the coalition, Russia, refused to participate in additional cuts. They had previously signaled their resistance to additional production cuts in February when OPEC floated the idea.

Oil prices plunged by nearly 10% following this surprise move by Russia. It had been widely expected they would go along with the plan, because the alternative seemed much worse. So what exactly are they thinking?

Deja Vu

Let’s rewind back to 2014, when OPEC initially declared war on U.S. shale oil producers. Oil prices had begun to weaken as shale oil production continued to expand, so OPEC decided it needed to act to protect market share. A price war ensued that dropped oil prices all the way into the $20s. At that time I noted that the decision would probably cost OPEC a trillion dollars or more (and it likely did).

While some shale producers were forced into bankruptcy, most were far more resilient than OPEC had imagined. Thus, two years later OPEC waved the white flag and returned to the strategy of making production cuts in order to support prices.

The downside of this strategy for them was that, while these production cuts do help support oil prices, they also keep U.S. shale oil producers in business. So, shale production in the U.S. kept expanding. This put OPEC in the cycle of having to cut production again and again as shale production kept climbing. Many OPEC members deemed this unfair, but they had already experienced the alternative and it was worse.

From Russia’s point of view, all this strategy was doing was propping up U.S. oil producers at the expense of everyone else. The only way this strategy would ultimately work would be for OPEC and its partners to keep cutting until U.S. shale oil production began to decline. Their hope was that this happened sooner rather than later, but in the interim OPEC production fell to a 17-year low.

It’s worth noting that Russia also needs the money from its oil exports. But it is embarking on a potentially expensive gamble in refusing to cooperate with OPEC. They may sell more oil this way, but at a far lower price.

Coronavirus Changes the Equation

But the global coronavirus (COVID-19) outbreak has forced the issue. Now, instead of having to deal with the addition of another million BPD of U.S. shale every year, suddenly they had to cope with millions of barrels of excess oil on the market as demand collapsed in response to the coronavirus outbreak.

So, Russia is effectively revisiting the 2014 strategy of defending market share. Saudi Arabia, in response to Russia’s decision, made the biggest cuts to the price of its crude oil in more than 30 years. Aramco shares, in turn, fell below their IPO price for the first time.

I have written many times that OPEC is in a no-win situation with respect to U.S. shale oil production. The group tried one costly strategy, and then another, and now it is being forced by Russia back to the original strategy. Related: Saudi Arabia Strikes Back At Russia In Key Oil Market

As I wrote last month, oil prices could fall much further without Russia’s cooperation in making additional cuts. Now that it is clear that this is the path forward, we are entering an extremely painful period for oil producers everywhere. Oil prices will collapse. Oil producers are going to go bankrupt. Government budgets are going to be drained in oil-exporting countries.

The End Game

It is likely, in my view, that the endpoint will be similar to the last time this strategy was attempted. Oil prices could dip all the way into the $20s. Russia will probably eventually decide that the pain is too great, and come back to the table. In the interim, many shale oil producers will be forced into bankruptcy.

Meanwhile, a bigger existential risk looms for the global oil industry. Electric vehicles (EVs) will continue to gain market share year after year. If we are entering a multiyear oil price war — as seems likely — it is possible that the oil industry never recovers.

That is what can happen when there is a black swan event like coronavirus. The outcome can be beyond imagination. We have entered uncharted waters.

By Robert Rapier

Edited Harry Miller

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Russia, Saudi Arabia, 'Very Close' To Reaching Oil Output Deal – OilPrice.com

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Russia, Saudi Arabia, ‘Very Close’ To Reaching Oil Output Deal | OilPrice.com

Tsvetana Paraskova

Tsvetana is a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. 

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    Saudi Arabia and Russia are “very, very close” to reaching an agreement on how to react to the low oil prices, Kirill Dmitriev, chief executive at Russia’s sovereign wealth fund, the Russian Direct Investment Fund (RDIF), told CNBC on Monday.

    “I think the whole market understands that this deal is important and it will bring lots of stability, so much important stability to the market, and we are very close,” Dmitriev told CNBC on the day on which the former allies were set to hold a video meeting with other major producers, including U.S. representatives, to try to hammer out an agreement for a global collective cut of 10 million bpd and even more.  

    The meeting is now delayed to later this week, possibly April 9, OPEC sources told Reuters, after the spat between the Saudis and the Russians over who broke up their partnership took a turn for the worse over the weekend.

    First, Russia’s Energy Minister Alexander Novak and President Vladimir Putin said on Friday that Saudi Arabia withdrew from the OPEC+ agreement, announcing “significant additional discounts on their oil, as well as plans for a sharp increase in production,” as per the Kremlin’s English translation of a meeting between Putin and Novak on the global energy markets. 

    “As I said, we did not initiate the breakup of the OPEC+ deal. We are always ready to reach an agreement with our partners, in the OPEC+ format, and we are prepared to cooperate with the United States on this issue. I consider it necessary to pool our efforts to balance the market and reduce production as a result of these concerted and well-coordinated efforts. Based on tentative estimates, I believe the reduction should be about 10 million barrels per day, more or less,” Putin said.

    “The key partners in balancing the market should be producers like the United States,” Novak said, after noting that “Unfortunately, our partners from Saudi Arabia did not agree to extend the current deal on the current conditions. In fact, they withdrew from the agreement and announced significant additional discounts on their oil, as well as plans for a sharp increase in production.” Related: The Largest Rig Count Collapse In 5 Years

    Saudi Arabia reacted to these statements by putting out a statement from Energy Minister Abdulaziz bin Salman, who said that, via the Saudi Press Agency:

    “These claims are categorically false and contrary to fact.”

    “His Royal Highness noted that the Kingdom has exerted great efforts with OPEC+ countries to take action to prevent a glut in the oil market resulting from a decline in the global economic growth. However, this proposal made by the Kingdom and approved by 22 countries, unfortunately was not agreed upon by the Russian delegates, leading to non-agreement,” Saudi Arabia said.

    While the Saudis and Russians spat over who is to blame, they both signal that they would not cut production if the U.S. doesn’t join a global effort to reduce output.  

    By Tsvetana Paraskova for Oilprice.com

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      Oil prices pull back after OPEC and Russia delay discussions on cutting output – CBC.ca

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      Oil prices fell on Monday after Saudi Arabia and Russia delayed a meeting to discuss output cuts that could help to reduce global oversupply as the coronavirus pandemic pummels demand.

      Brent crude fell more than $3 US when Asian markets opened but recovered some ground, with traders hopeful a deal between the top producers was still within reach.

      Brent was down 81 cents, or 2.4 per cent, at $33.30 US a barrel. U.S. crude was 65 cents, or 2.3 per cent lower, at $27.69 a barrel, after having earlier been as low as $25.28.

      The Organization of the Petroleum Exporting Countries and its allies, a group known as OPEC+, are expected to meet on Thursday, instead of Monday, to discuss cutting production.

      “Perhaps it is best that the meeting was delayed for producers to cement a minimum of common ground before the actual discussions take place on Thursday,” BNP Paribas analyst Harry Tchilinguirian said. He noted initial disappointment at the delay had driven down prices in Asian business.

      Kremlin spokesperson Dmitry Peskov said Moscow was ready to co-ordinate with other oil exporting countries to help stabilize the market and that the OPEC+ meeting was delayed for technical reasons.

      OPEC+ is working on a deal to cut production by about 10 per cent of world supply, or 10 million barrels per day (bpd), in what member states expect to be an unprecedented global effort.

      But Rystad Energy’s head of oil markets, Bjornar Tonhaugen, said even if the group agrees to cut up to 15 million bpd, “it will only be enough to scratch the surface of the more than 23 million bpd supply overhang predicted for April 2020.”

      Sentiment was lifted by Saudi Arabia’s decision to delay releasing its official crude selling prices to Friday, pending the outcome of the OPEC+ meeting.

      U.S. President Donald Trump has said he would impose tariffs on crude imports if needed to protect U.S. energy workers from the oil price crash.

      Investor morale in the eurozone fell to an all-time low in April and the bloc’s economy is in deep recession because of the novel coronavirus, a survey showed on Monday.

      “Wherever you look, the narrative is the same: the global economy is in a painful recession,” Stephen Brennock of oil broker PVM said. “As OPEC+ ponders fresh supply curbs, you can’t help but think that the oil market will continue to be at the mercy of the virus pandemic.”

      Second wave of COVID-19 infections in China

      Markets were also spooked when the National Health Commission of China said on Monday that 78 new asymptomatic cases had been identified as of the end of the day on Sunday, compared with 47 the day before.

      Asymptomatic patients, who show no symptoms but can still pass the virus to others, have become China’s chief concern after strict containment measures succeeded in cutting the overall infection rate.

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      Premarket: Stocks jump on virus slowdown hopes, but oil slips on oversupply – The Globe and Mail

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      World stock markets jumped on Monday, encouraged by a slowdown in coronavirus-related deaths and new cases, though a delay in talks between Saudi Arabia and Russia to cut supply sent oil tumbling again.

      Equity investors were encouraged as the death toll from the virus slowed across major European nations including France and Italy.

      London’s FTSE raced up 2%, indexes in Paris and Milan rose 3% and Germany’s DAX gained more than 4% after Japan’s Nikkei finished with similar gains overnight.

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      There was plenty of news to demonstrate just how brutal the virus has been: eye-popping plunges in car sales and air travel in Europe, Britain’s prime minister being hospitalised , and Japan preparing to declare a state of emergency. But the markets appeared hopeful.

      Wall Street S&P 500 emini futures were up almost 4%, close to their upper limit too, buoyed by comments from U.S. President Donald Trump that his country was also seeing a “levelling off” of the crisis.

      “What is driving the market is the evidence that the number of new cases has started to turn the corner,” said Rabobank’s Head of Macro Strategy Elwin de Groot.

      As well as a slowdown in deaths in Italy, he said, improvements were starting to become visible in Spain and even in the United States there had been a little bit of a let-up.

      “When you see that happening you can start gauging when lockdowns can start to be gradually lifted. That gives a little bit more visibility and that is vital,” he added, although he stressed there were still huge uncertainties and risks.

      As has been the pattern for most of the year, commodity markets saw the day’s other big moves.

      Brent crude fell as much as $4 after Saudi Arabia and Russia, who have been at loggerheads this year over production, pushed back the planned start of a meeting of the Organization of the Petroleum Exporting Countries and its allies, a group known as OPEC+, until Thursday.

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      OPEC+ is working on a deal to cut oil production by about 10% of world supply, or 10 million barrels per day (bpd), in what member states expect to be an unprecedented global effort.

      The countries are “very, very close” to a deal on cuts, one of Russia’s top oil negotiators, Kirill Dmitriev, who heads the nation’s wealth fund, told CNBC.

      But Rystad Energy’s head of oil markets Bjornar Tonhaugen said even if the group agreed to cut up to 15 million bpd, “it will only be enough to scratch the surface of the more than 23 million bpd supply overhang predicted for April 2020.”

      EMERGENCY CALLS

      In currency markets, the yen fell 0.6% to 109.14 against the dollar and weakened against other major currencies as Japan’s Prime Minister Shinzo Abe said the government would declare a state of emergency as early as Tuesday to curb a spike in coronavirus infections.

      The dollar barely budged against the euro but the pound recovered having dipped 0.4% after British Prime Minister Boris Johnson was admitted to hospital for tests as he was still suffering symptoms of the coronavirus.

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      Yields on safe-haven German government bonds crept higher in fixed income markets too, reflecting the slightly brighter tone in world markets despite some painful data.

      Investor morale in the euro zone fell to an all-time low in April and the currency bloc’s economy is now in deep recession due to the coronavirus, which is “holding the world economy in a stranglehold”, a Sentix survey showed.

      Orders for German-made goods had already dropped 1.4% in February, German data showed. British car sales slumped 40% last month and Norweigen Air’s traffic plummeted 60%.

      “Never before has the assessment of the current situation collapsed so sharply in all regions of the world within one month,” Sentix managing director Patrick Hussy said.

      “The situation is … much worse than in 2009,” Hussy said. “Economic forecasts to date underestimate the shrinking process. The recession will go much deeper and longer.”

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      In Asia, stocks had also proven bullish. Australia’s benchmark index rose 4.33%, Japan’s Nikkei added 4.24% after a slow start, while South Korea’s KOSPI index climbed 3.85%. Hong Kong’s Hang Seng index was 2.18% higher.

      That sent MSCI’s broadest index of Asian shares outside of Japan up 2%, on track for its best performance in more than a week.

      Markets in mainland China were closed for a public holiday.

      Worryingly, the number of new coronavirus cases jumped in China on Sunday, while the number of asymptomatic cases surged too as Beijing continued to struggle to extinguish the outbreak despite drastic containment efforts.

      “Focus in markets will now turn to the path out of lockdown and to what extent containment measures can be lifted without risking a second wave of infections,” National Australia Bank analyst Tapas Strickland wrote in a note.

      “Key to a strong rebound in China will be the ongoing lifting of containment measures, with Wuhan – the epicentre of the outbreak – set to lift containment measures on April 8.”

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      Reuters

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