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BRENT -35% : Has Saudi & Russia Decided to Kill USA Shale ?

Background

In December 2019 OPEC+ decided on additional production cut of 500,000 bbl per day thats resulted in total cut of 1.7mn bbl per day till March 31st. But in February 2020 Coronavirus spread from China to other nations have put a big question mark over demand in CY2020 as shut downs in various parts of the world intensified and oil purchases from China showed a large drop due to lower refinery output.

This resulted in Saudi and other OPEC members to call in an emergency meeting of OPEC+ that would address the fall the oil prices or any further fall in prices that would impact budgets of Middle East nations that already running on sizeable deficit.

What Happened During OPEC+ meeting ?

Going into the meeting Saudi wanted a cut off 1-1.5 mn bbl per day that had support from most of OPEC and Non-OPEC nations. But Russia was not comfortable to react on the short term demand disruptions and decide on the such a large cut for the full year.

But during the scheduled sessions from 4th to 6th March there were various informal meetings with new Saudi Energy Minister and Russia counter part but Russia was firm on its stance that it still wants to see the demand numbers for more time before taking a large cut in production. This was due to Russia facing various sanctions from USA directly or indirectly via Venezuela or Iran.

At the end of the session on 6th March it was communicated that post March when the current agreement ends there is no restriction on any country and they can pump oil as much as they wanted.

Commentary from various member nations were negative and had put question on the co-operation that existed between Russia and OPEC.

Why Did Russia take that stand ?

Since the OPEC cooperation started with Russia there has been a large shift in market share of Top 3 oil producing nations in regards of volume.

As seen above USA has overtaken both the nations from late 2017 and the difference has increased but July 2019 as the USA signed various long term agreements with various nations especially India and China that are largest oil consuming nations.

Given low cost of producing oil in the country it has been communicated by President Putin at various junctures that he is ok with a price of $40/bbl as well and that the country needs to get used to a range of $40/bbl -$60bbl. Below is the cost of production and total cots of oil as per country.

Why Did Oil Fell 35% Today ?

Post the OPEC+ meeting Saudi energy minister said that everyone will be left wondering now as the quotas end in March.

Over the weekend Saudi had sent April prices to all it customers in that it communicated a price cut of $4-$6/bbl for Asia and Europe customers and almost $7 cut for USA customers. Along with some news reports mentioning that it will not hold back on production and will may even produce higher that 12 million bbl per day if the demand increase from its customers.

This did not go well with global financial markets including the commodity markets that resulted in first large negative reaction in Kuwait and Saudi markets that opened on Sunday. Kuwait stock market index opened with circuit down limit and Saudi stock market index saw large cut of 6% including Saudi Aramco stock price below its IPO price.

Monday when the global financial markets opened there were large cuts seen through out the markets. BRENT saw a drop of 35% to $31/bbl from Friday close of $46/bbl that was already 10% lower post OPEC+ session ended. S&P and other USA Indices futures were at lower circuit and have halted , they would reopen when the spot markets open and go to second lower circuit of 7%.

What Will Happen Now ?

Oil prices have crashed to 2016 lows but we believe there can be further downside as Saudi and Russia have shifted the focus on production volumes and regaining the market share.But we believe the motive is not only that it also to make a lot of USA shale and non-shale production unviable this would result in closures of rigs that have already reduced from 834 in March 2019 to 682 in March 2020. And plus a plunge in currency against dollar will benefit the nations in better price of oil in local currencies.

Though this is a dangerous strategy by both nations but it was due and this covid-19 driven plunge in demand and financial markets can help in regaining the markets shares at lower impact cost to country financials.

Russia has still communicated that OPEC+ charter still stands and it will collect producers data and will meet in June 2020 as per schedule.

For India and China it is beneficial as the countries are highest consumption nations and had increased oil purchases from USA. As per Reuters , at least four Asian refineries aim to maximise Middle East crude purchases for April after Saudi Aramco drastically cut prices.

Below is oil price since 1991 including the GULF oil crisis period in 1998 and there can be similar price fall if the nations involved do not act in June meeting.