Energy Voice

Posted: 06 April 2020

Saudi, Russia rift widens

 

US President Donald Trump’s call for a 10 million barrel per day – or even 15mn bpd – cut drove up oil prices last week but weak demand continues to run the show, with little respite expected from talks due to take place this week.

The dramatic way in which the OPEC+ meeting on March 6 fell apart, with Russia refusing to offer assistance and Saudi Arabia setting out plans to turn on the taps has seen the world become awash with crude. Neither side seemed to expect that things would fall apart quite as they did or that the escalation of coronavirus could reduce oil demand by as much as 20mn bpd.

Talks were due to be held on April 6, via video conference, with market hopes that an agreement might be reached on cutting output. Over the weekend, as the Russians and Saudis trading barbs in a blame game over the price collapse. The meeting has now been pushed back, perhaps to April 9.

It would be logical that the major producers reach an agreement to cut production. We don’t have a completely clear picture on how great the real state of oversupply is or how full storage, is but it’s clear there’s much more oil being produced than we need,” said Investec’s head of commodities Callum Macpherson.

That said, it’s incredibly complicated and there’s no precedent for such an agreement to be reached between OPEC, the OPEC+ countries, the US, Canada.

Reaching such an agreement will be difficult given uncertainty over quite how far demand has fallen.

Riyadh’s thinking

Saudi is warming to the idea of action, but would require multilateral support for such a move. The country will probably need to engineer a way in which to cut production within the next six months, Falanx Assynt’s managing director Charles Hollis said.

Given the amount of oil that has gone into storage and reduced demand, resetting the market may be challenging. Kuwait and the United Arab Emirates will want to see co-ordinated action, while Oman and Bahrain need higher prices. A gesture of solidarity for its Arab brethren might be how Saudi spins a reversion of policy,” Hollis said.

Saudi needs a higher oil price in order to balance its books. While the country has extremely low production costs, its budget only breaks even at a price around $80. It has a big reserve of cash, but this has been being depleted for some time.

Given the price crash, Riyadh has reduced its budget spending by 5%, although Hollis said further cuts were likely needed.

Social spending has been seen as one of the ways that the Saudi government secures support from its citizens. In addition to the budget reduction, those citizens who chose to invest in the Saudi Aramco IPO will be sitting on paper losses, which puts further pressure on the government.

Saudi’s decision to walk out of the OPEC talks in Vienna was a “hell of a risk”, he said. “There has been volatile decision making in a number of areas over the last three years and the recent decision on oil output may fall into that.”

The Falanx Assynt official attributed Saudi’s decision to flood the market as a gambit aimed at Russia.

Moscow’s move

There is a genuine reluctance in Russia to cut production. The feeling is that, at this point, such a move would be meaningless given uncertainty over demand,” the Oxford Institute for Energy Studies’ James Henderson said.

Russian reluctance to participate in the cuts dates back to at least October 2019, he continued. The cuts they had brought in were more...