Oil. A difficult agreement

Date: 7 April, 2020 - Blog

The oil price war initiated by Saudi Arabia began in the midst of the coronavirus crisis

With half the world’s population in confinement, analysts expect a decline of between 15 and 20 million barrels / day between February and April, or 15-20% of global demand. For the following months, demand should remain under pressure, since global deconfinement will not be as rapid as national deconfinement, as countries fear the imported coronavirus. Tourism, as well as commercial and vacation aviation, will remain well below their growth potential. After falling 68% to $ 23, Brent rebounded 48% to $ 34 with hopes of a reduction in supply from OPEC, Russia and the United States.

With the difficulties arriving for American shale oil, which needs a barrel price between $35- $55 to be profitable, Donald Trump asked Russia and Saudi Arabia to reduce their production substantially, by 10-15 million b / d, which does not seem realistic.

But an agreement seems difficult:

  1. Russia and Saudi Arabia blame each other on the termination of the OPEC + agreement.
  2. Russia would agree, but only if the US participates.
  3. The United States federal government cannot impose a reduction in oil production because of the Antitrust law. On the other hand, a reduction is possible at the state level.
  4. The association of US oil companies refuses any reduction in production for economic and ideological reasons. ExxonMobil is firmly opposed to it.
  5. Russia cannot drastically reduce its production, at the risk of damaging its facilities.
  6. Saudi Arabia does not want to cut back on its own.
  7. Damage to the US oil industry is good for Russia and Saudi Arabia.
  8. Donald Trump will have to make major concessions, such as the recognition of the North Steam 2 gas pipeline, connecting Russia to Germany.

But we must act, because in a few weeks, all the storage capacities (tanks, tankers) will be full, forcing massive and disorderly closings of production sites, with lasting damage. The Railroad Commission of Texas, the Texas entity with the power to cut production in Texas only, has entered into discussions with OPEC.

An agreement will stabilize prices around $ 30 and give companies time to adjust their output. The American Petroleum Institute urges the White House to impose sanctions on Russia and Saudi Arabia to force them to cut production. The Secretary of State for Energy is reportedly considering banning / taxing oil imports into North America or forcing North American refiners to use only domestic oil. But the API and the American Fuel & Petrochemical Manufacturers oppose restrictions on foreign oil, considering that the purchase of oil around the world by US refiners is a competitive advantage (by choosing the best prices and the adequate quality).

  • Intense discussions will take place this week; those scheduled for Monday have been postponed to Thursday
  • An agreement seems complicated. Failure would mean another drop in oil prices
  • In the event of an agreement, it is unlikely that the reduction in production can compensate for the 15-20% drop in aggregate demand. But it will at least stabilize prices
  • According to some traders, an agreement would only delay the inevitable
  • US production will drop
  • Underweight in the Energy sector: high risk and volatility, low visibility