Ending The Oil War Isn’t Enough

Oil may have gained 20% on Trump's tweets Thursday, but heed this: Even if OPEC+ agrees to a purported 10-million-bpd cut and even considering that China has ordered all of its oil companies to buy up oil on the cheap to fill strategic reserves, it's not going to get demand anywhere close to where the market needs it. 

It will, however, alleviate the immediate critical issue of running out of oil storage space. 

There is a lot of talk about Trump "pressuring" Saudi Arabia and Russia on this, but the only real pressure on both is their own economics and the global COVID-19 disaster, which makes this oil price war and market share game untenable at best. 

Also beware that Iraq is planning to increase production by 200,000 bpd this month, despite all. 

The backdrop to Thursday's oil bump was a series of tweets from Trump following a phone call with MBS in which the Crown Prince allegedly said Saudi Arabia and Russia would cut by 10 million barrels. He also said he expected a deal between Saudi Arabia and Russia "within a few days". President Trump later confirmed at the daily press briefing on the coronavirus that the 10-million-barrel figure was actually mentioned in the call.

OPEC sources later confirmed that an OPEC+ meeting had been called for Monday, and that 10 million bpd was the figure that is being considered. OPEC sources also said that the US regulator would be invited to the meeting as the world's largest oil producer.

The reason for the urgent meeting, the Saudi Press Agency said, was at the request of the United States President. The Saudis have previously intimated that Russia is still being uncooperative. Previously, the Kremlin issued a statement saying that it doesn't plan to boost output further. But today, reports trickled in that Russia would agree to a cut if Saudi Arabia and the U.S. agreed to cuts, too.

So, are Trump's tweets realistic? Yes, they are. Are they the result of "pressure" from the United States? Not likely. Russia's game - which was a surprise response to the Saudi's request of another OPEC+ production cut - comes at a serious cost for Moscow. Driving prices down so low decimates Iran and Venezuela. In other words, the geopolitical cost (one of them) was betraying Russia's key allies in the global game of chess that is statesmanship. That's how much Moscow has decided it is worth trying to undermine the U.S. shale patch. The game was to see how far Moscow could go considering that American shale producers have a much higher breakeven than their Russian counterparts. 

Moscow will bend because it has to, and it hadn't planned on a pandemic to skew the results. But even once they knock off this game, and even with China scooping up oil at rock-bottom prices for its reserves, there will be the COVID demand culling to deal with, and it's a force of nature with which there is no negotiating.