Russia-Saudi Oil War

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Russia-Saudi Oil War

The Saudi row with Putin over oil production undid months of quiet diplomacy between Moscow and Riyadh. This began when Putin seized on Trump’s non-reaction to strikes on two Saudi Aramco gas separation plants by Iranian drones and cruise missiles last September. The Russia-Saudi Oil War starts now.

Behind a Saudi-Russian truce to stabilize oil markets with a record output cut, market players are seeing the two production heavyweights still trading blows in the physical market.

Russia has relied on Asian markets as a destination for its oil output since launching the 1.6 million barrel per day ESPO pipeline. This connects Russian fields to Asian markets through the port of Kozmino, the country’s main eastern export outlet, and also via a pipeline spur with China, the biggest Asian consumer.

Saudi Arabia’s state oil company Saudi Aramco and Russia’s Energy Ministry did not immediately respond to requests for comment. Russia’s state oil giant Rosneft declined to comment.

OPEC and other big oil-producing countries were meant to have a virtual meeting Monday to divvy up production cuts that could restore a semblance of balance to a market that has been driven badly out of whack by the global economic collapse due to the corona-virus pandemic, but that meeting has been pushed back until Thursday, at least. And Saudi Arabia and the International Energy Agency are pushing for a meeting on Friday of G-20 countries.

It usually takes some kind of shock to get the dominant monopoly to go into cliff mode. In the late 1990s, the catalyst was the negative demand shock of the Asian financial crisis. During the most recent oil market crash, in 2014, it was the supply shock of US shale oil. For some time, the model shows, the market had been waiting for the right signal. The corona-virus has provided it.

While the cliff is familiar, its steepness is unprecedented. The demand impact of the corona-virus is so devastating that it is giving Russia and Saudi Arabia a unique chance to test global storage capacity limits.

The fuller storage capacity gets, the closer oil prices will get to zero. When and if capacity is maxed out, oil prices will turn negative. On current trends, this could happen within months if not weeks.

OPEC+ leaders Saudi Arabia and Russia arrived at an historic crude production cut late Thursday, effectively halting a bitter oil war which saw prices implode by more than 50% from January highs. Here are some key features of truce:

  • Members will adjust downwards their overall crude oil production by 10.0 mb/d, starting on 1 May 2020, for an initial period of two months that concludes on 30 June 2020. For the subsequent period of 6 months, from 1 July 2020 to 31 December 2020, the total adjustment agreed will be 8.0 mb/d.
  • To be followed by a 6.0 mb/d adjustment for a period of 16 months, from 1 January 2021 to 30 April 2022.
  • The baseline for the calculation of the adjustments is the oil production of October 2018, except for the Kingdom of Saudi Arabia and The Russian Federation, both with the same baseline level of 11.0 mb/d.
  • The agreement will be valid until 30 April 2022, however, the extension of this agreement will be reviewed during December 2021.

The U.S. shale patch has been rooting for such an agreement, which ideally would cut supply, raise prices, and toss a lifeline to an industry that has been buffeted by catastrophically low prices. President Trump pushed for a 10-15 million bpd OPEC production cut personally in an April 2nd phone call with Russia’s Vladimir Putin and Crown Prince Saudi Arabia Mohammed bin Salman. It seems OPEC listened.

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