March 30, 2020
Three weeks ago, when the Russian and Saudi war on U.S. shale oil started, we wrote:
In the first week of January crude oil reached $69/bl but it has since dropped to $45/bl as the coronavirus crisis destroyed the global demand. The Saudis tried to make a deal with Russia, the second largest exporter after Saudi Arabia, to together cut oil production to keep the price up. But Russia rejected a new OPEC cut. It wants to keep its production up and it will use the crisis to further undermine U.S. oil fracking production. As the whole fracking boom in the U.S. is build on fraud the move might well be successful.
Russia does not have a budget deficit and is well positioned to survive lower crude oil prices without much damage. Saudi Arabia is not.
Only a week later oil was already at $30/barrel and we predicted that it would go down to $20/bl.
On Monday the U.S. WTI oil price index reached that mark. Oil prices in other places are falling even further:
Canadian heavy crude has become so cheap that the cost of shipping it to refineries exceeds the value of the oil itself, a situation that may result in even more oil-sands producers shutting operations.
Western Canadian Select crude in Alberta dropped to a record-low close of $5.06 a barrel on Friday, according to Bloomberg data going back to 2008 …
The corona virus crisis has led to drop in global demand by some 20%. The world production and consumption in normal times was at about 100 million barrel per day. Consumption is now below 80 million bl/d. But after the OPEC+ agreement failed Saudi and Russia both started to pump as much as they could to regain market shares. Together they are increasing their production by some 3-4 million barrels per day. All that oil has to go somewhere.
Trump announced that he would use the cheap prices to fill the U.S. strategic oil reserve. But the spare room in the reserve storage at that time was only some 150 million barrels. As it can only be filled at a rate of 2 million barrels per day the topping off of the reserve is insignificant in the current market.
The oil producers at first pumped their oil into storage tanks to be sold later. When those filled up they rented supertankers to store the oil at sea. But empty supertankers are now also getting rare and the price for them is increasing:
The CEO of the world’s largest tanker owner, Frontline Ltd., said on Friday that he’d never known such demand to hire ships for long-term storage. Traders could book ships to put 100 million barrels at sea this week alone, he estimated, but even that could accounts for less than a week’s oversupply.
The only solution will be a shut down of the more expensive oil fields. Canada and Brazil are already doing it. U.S. shale producers who are bleeding cash will now have to follow.
That is clearly what Russia wants:
As soon as U.S. shale leaves the market, prices will rebound and could reach $60 a barrel, Rosneft’s Igor Sechin said recently. As fate would have it, in what many would have until recently considered an impossible scenario, a lot of U.S. shale might do just that.
Breakeven prices for U.S. shale basins range between $39 and $48 a barrel, according to data compiled by Reuters. Meanwhile, West Texas Intermediate (WTI) is trading below $25 a barrel and has been for over a week now.
The Trump administration has asked the Saudis to produce less oil but as the Saudi tourist industry is currently also dead the Saudi clown prince needs every dollar he can get. The Saudis will continue to pump and they will sell their oil at any price.
The White House is now concerned that it will completely lose its beloved shale oil industry and all the jobs connected to it.
Russia of cause knows this and a few days ago it made an interesting offer:
A new OPEC+ deal to balance oil markets might be possible if other countries join in, Kirill Dmitriev, head of Russia’s sovereign wealth fund said, adding that countries should also cooperate to cushion the economic fallout from coronavirus.
…
“Joint actions by countries are needed to restore the(global) economy… They (joint actions) are also possible in OPEC+ deal’s framework,” Dmitriev, head of the Russian Direct Investment Fund (RDIF), told Reuters in a phone interview.
…
“We are in contact with Saudi Arabia and a number of other countries. Based on these contacts we see that if the number of OPEC+ members will increase and other countries will join there is a possibility of a joint agreement to balance oil markets.”
Dmitriev declined to say who the new deal’s members should or could be. U.S. President Donald Trump said last week he would get involved in the oil price war between Saudi Arabia and Russia at the appropriate time.
A logical new member of an expanded crude oil cartel would be one of the biggest global producer that so far was not a member of that club – the U.S. of A.
We now learn that Trump is ready to talk about that or other concepts:
As Ria reports (in Russian) the topics of upcoming phone call [between Putin and Trump] will be Covid-19, trade (???) and, you guessed it, oil prices.
Trump, who sanctioned the Russian-German Nord-Stream II pipeline while telling Germany to buy U.S. shale gas, is now in a quite bad negotiation position. Russia does not need a new OPEC deal right now. It has many financial reserves and can live with low oil prices for much longer than the Saudis and other oil producing countries. Trump would have to make a strategic offer that Russia could not resist to get some cooperation on oil prices.
But what strategic offer could Trump make that would move Putin to agree to some new deal?
Ukraine? Russia is not interested in that unrulable, bankrupt and fascist infested entity.
Syria? The Zionist billionaires would stop their donations to Trump if he were to give up on destroying it.
Joining an OPEC++ deal and limit U.S. oil production? That would be an anti-American intervention in free markets and Congress would never agree to it.
And what reason has Russia to believe that Trump or his successor would stick to any deal? As the U.S. is non-agreement-capable it has none.
The outcome of the phone call will therefore likely be nothing.
The carnage in the oil markets will continue and will ravage those producer countries that need every penny while the corona virus is ravaging their people. Meanwhile the U.S. shale market will go bust.
