Market Overview

3 April 2020

The Coming Decline in Oil Production up to 15 million bpd: Reality or Fake?

Oil prices suddenly woke up on Thursday, from the unplanned spring slumber posted on Wednesday at a place that is perhaps not the bottom of prices. The messages and the latest news concerning the oil market is still ambiguous but it looks like something is actually being prepared. It all started with a tweet from the US President Donald Trump yesterday evening, that stated: "Just spoke to my friend MBS (Crown Prince) of Saudi Arabia, who spoke with President Putin of Russia, & I expect & hope that they will be cutting back approximately 10 Million Barrels, and maybe substantially more which, if it happens, will be GREAT for the oil & gas industry!" Then, just23 minutes later Trump added that he expects a reduction of 15 million barrels per day. Soon after, the Saudi Press news agency reported that Arabia is calling an urgent meeting of the OPEC+ group of producers "in appreciation of the US President's request." OPEC+ is the informal community that includes the Organisation of Petroleum Exporting Countries (OPEC itself) and several countries that are not permanent members of the cartel, the largest oil producer among these is Russia.

As a result, the prices of benchmark Brent crude oil three-months futures jumped from $24.2 to $33.5 per barrel shortly after, but almost immediately returned to a more appropriate price range of $26-28 per barrel. Misunderstandings of the situation and the return of prices were generated partially by highly compressed technical patterns that were previously seen , but fundamentally also by the hot comments by Russia's President spokesman Dmitry Peskov. He said that Mr Putin did not speak by phone with the Saudi Prince. This statement caused a fuss, and many confusing questions immediately arose like whether Mr Peskov was informed about the conversation or not at the time of his statement, or if Mr Trump, after talking with the Saudi Prince, decided in his own imagination that now "everything will be fine" and that the Russians will not argue with that. Whose information was more accurate, that supplied by Peskov or by Trump? Not to mention that the market majority believed that production could be reduced with joint efforts even by 20 million barrels per day, but... if the demand has fallen even sharply due to the pandemic, then what production cuts could influence the market and oil producers, who could save money on the enormous cost of oil storage? After all, nobody is able to sell more than somebody is ready to buy. So, the next move with the joint agreements of the Arabia-Russia-US triangle may be very interesting and even hopeful, but it's not a given fact that it will help oil prices for a long time to come as the demand should recover in first place.

Brent prices on Friday afternoon soar again past the $30 level and, perhaps, the oil market has a good chance to rebound and even reclaim a foothold higher if the subsequent news at least will not refute the accumulated positive information. The Russian TASS news agency confirmed that today the Texas oil regulator did discuss with the Russian energy minister Alexander Novak the possibility of an agreement on production cuts by 10 million barrels per day, which is more than ten % of today's global production. Donald Trump explained that he was referring to information from the Saudi Prince who is in regular contact with other OPEC+ countries and that they would jointly like to reduce the supply and would probably be able to do so. The OPEC+ video conference is tentatively scheduled for April 6, according to Bloomberg reports. There is also some encouraging statistics that production in Russia in March decreased by 0.1% to 11.294 bpd, according to Bloomberg, and that there are no plans to increase Russian oil production in April, the sources from the Russian energy ministry claimed. (The main question here is whether it was worth it to exacerbate the contradictions before when Russian representatives rejected the first compromise with the Saudis in the beginning of March). The energy ministry of Kazakhstan was also cited as saying that they are ready to reduce their production in the next months.

Some unnamed sources told Reuters that the Texas regulator has already begun to build contacts with producers from other North-American states, and they are going to open hearings on regulating oil production during the conference call or live meeting that is tentatively scheduled for April 14. President Putin only confirmed that the situation on the oil market was indeed discussed with the United States, and he expressed the opinion that oil producers and consumers should find some solution to improve the situation. At the same time, if no agreement is found at all and everything goes wrong again, oil prices may slip sharply and even below $20 per barrel as the risk hedgers, including the badly suffering US shale producers, who may quickly take advantage of the temporary increase in prices to sell as much as they can.

Reuters reported that in a telephone conversation Trump asked Saudi Arabia crown prince not to dump at least for the beginning, that is, not to lower the price of supplies to a level that could be dangerous for United States producers. There is some positive sign also in the fact that the US energy department officially announced that it will provide American private companies with strategic capacities of up to 30 million barrels so that they can store their oil. The companies themselves do not have enough capacities to store crude oil and the pledge from the US Energy Information Administration (EIA) will make sure they do not interrupt the operation of oil wells completely. It is also possible that this oil might be later acquired to the federal reserve if the US Congress will finally approve such funds for the government. A group of congressmen wrote a letter to State Secretary Mike Pompeo with convincing arguments to use all diplomatic channels of influence on Saudi Arabia and Russia. Donald Trump is scheduled to meet with the management of major US oil companies and they will probably discuss the opportunities not only to support the industry but the coordinated of production cuts if the producers could agree it with OPEC+. The information from this meeting will be available after market close on Friday. But some oil giants like ExxonMobil have already opposed the interruption of Trump into oil market regulation.

There are also calls to support the new US sanctions against Russia and Saudi Arabia, such an information campaign has been launched by a number of oil producers in the United States. Oil companies hope to influence the two oil-producing States through the leadership of their country so that they reduce production, the Financial Times (FT) newspaper reported on April 3, citing sources. The publication notes that the United States may propose the introduction of duties on oil imports, the suspension of military assistance to Saudi Arabia, the introduction of tariffs on Russian energy exports and some other measures. There is also a theory circulating among US politicians that anti-Russian sanctions could be lifted only if Moscow agrees to cooperate with Washington. In theory US authorities have enough leverage to try to put pressure on other oil producing countries as well.


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Lysakov Sergey
Market Focus

Material posted here is solely for information purposes and reliance on this may lead to losses. Past performances are not a reliable indicator of future results. Please read our full disclaimer.

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