Global financial markets have been a game of whack-a-mole lately. When equities appeared to have stabilized, Treasury yields slipped into subzero territory. After they recovered, the leading U.S. stock indexes suffered triple-digit losses. Crude oil is no different; it is a roller coaster ride. Crude suffered its worst single-day performance on record and then enjoyed its best one-day percentage gain in history. It has since turned into a mixture of a guessing game and a waiting game. We are twiddling our thumbs as the oil-rich nations negotiate a deal that would adapt to the current, turbulent conditions.
Don’t Be Crude
President Donald Trump spoke with CNBC on April 2 and revealed that he anticipates Saudi Crown Prince Mohammed bin Salman and Russian President Vladimir Putin would announce a new deal. He told the business news network that the two sides could negotiate an agreement that involves a cut in output by as many as 15 million barrels per day (bpd).
Trump later clarified on Twitter that he spoke with MBS and Putin. He did not provide a timeframe for the proposed measures, and he was not clear how the reduction would be distributed throughout oil-producing markets. Was this Trump’s embellishment or hopeful optimism?
Ryan Sitton, one of the three Texas Railroad commissioners, tweeted that he engaged with Russian Energy Minister Alexander Novak about a production cut. They discussed a 10-million decrease from the global supply, noting that it is necessary to establish an “unprecedented level of international cooperation.”
Hours later, the Kingdom recommended an urgent meeting for OPEC+ and friends to reach “a fair agreement to restore the desired balance of oil markets.” The U.S. is invited, and officials will likely participate in the virtual powwow. China also announced that it would begin to buy oil for its emergency reserves, and that, too, helped the sector.
Despite the lack of details, these developments were enough to send crude prices rallying. West Texas Intermediate (WTI) soared 25% – the biggest single-day percentage increase on record. Brent, the international benchmark for oil prices, also surged 21% for its best day in history. It was an excellent performance for an energy commodity that collapsed 60% in March.
Prices have taken a hit on two factors: the Saudi-Russia strife and plummeting global demand. Right now, the economy is contending with a massive oversupply as producers keep pumping out black gold from the ground. The market is awash with so much crude that storage facilities have reached maximum capacity, and a growing number of crude tankers have nowhere to go. Until producers significantly slash their output levels, and the global economy returns to normal, it will be challenging to normalize inventories. And this is where the U.S. comes into play.
Feelin’ Refined
Although investors cheered President Trump’s comments, many analysts were skeptical. Industry observers note that a 15-million-cut would be hard to accomplish without the United States, since the U.S. has emerged as an energy giant in recent years due to the shale revolution, while Saudi Arabia’s and Russia’s slice of the pie has diminished. If Riyadh and Moscow are encouraged to contract production, then the U.S. would need to follow suit. Plus, several independent countries – Brazil, Canada, Iran, and Libya – would also have to concur.
The White House has yet to push American businesses to curtail operations, though many companies are already removing as much as $20 billion from their budgets. The industry has started to adapt because these prices make it unprofitable to drill for oil. That said, the U.S. is still transferring about 13 million bpd into the international marketplace.
Experts agree that without the U.S., any modification would be far below 10 million bpd – if anything.
Then there is the political chess match. Russia and Saudi Arabia could benefit from acquiescing to Trump’s suggestions. Moscow could agree to reduce output in exchange for Washington removing sanctions on government officials. Saudi Arabia could receive more military assistance as part of a deal to refrain from flooding the market with cheap oil. At the same time, Russia might have more of a fruitful relationship with Saudi Arabia than with an administration that could be in its final year.
Could OPEC+ concede to mutual destruction to destroy America’s energy transformation? By maintaining the status quo, the cartel decimates the U.S. shale industry and regains market share. Plus, as Cyril Widdershoven for Oilprice.com opines: “By doing nothing, Saudi Arabia and Russia can maintain the illusion that a production cut from OPEC+ would save markets.”
Three Oil Nations Walk into a Bar…
To say the crude industry is volatile right now would be an understatement. Analysts had forecast it would drop to the low teens, and perhaps even as low as $5 a barrel. Now that an agreement might be imminent, the smartest men and women in the financial community are expressing cautious optimism. Will oil meet these bearish estimates? It all depends on the three amigos: Riyadh, Moscow, and Washington. If a deal is struck, it could stay above $20, even in the middle of slumping demand. If deliberations fall through, it might crater to single digits. The former is a win for American businesses, and the latter, a win for consumers.
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Read more from Andrew Moran.
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