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Nick Cunningham

Nick Cunningham

Nick Cunningham is an independent journalist, covering oil and gas, energy and environmental policy, and international politics. He is based in Portland, Oregon. 

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Oil Price War: Is It Game Over For Trump?

The U.S. government is trying to convince Russia and Saudi Arabia to end the price war, but the Trump administration has few tools at its disposal.  Saudi Arabia has already hired additional supertankers and a wave of additional supply is about to set sail, according to Bloomberg. In the last week of March, exports rose to 9 million barrels per day (mb/d), up from a rate of 7 mb/d earlier in the month. 

Saudi Aramco has also apparently funneled a lot of oil into storage in Egypt, “a stepping stone to the European market,” Javier Blas and Brian Wingfield write for Bloomberg. Aramco is aiming to produce 12.3 million barrels per day (mb/d) in April. 

It may not be all smooth sailing. The Wall Street Journal reports that Aramco is struggling to find a home for all the additional supply. Some ships are departing from Saudi shores with oil but have no destination. “There are loadings [from Saudi ports in the Persian Gulf] with no destination on them because we don’t have buyers,” a Saudi official told the WSJ.

The Trump administration is pursuing several avenues to convince Riyadh and Moscow to back down from the price war. On Monday, Trump spoke with Vladimir Putin, where they agreed that “current oil prices aren’t in the interest of our countries,” according to a readout from Moscow. 

Trump also spoke with Saudi crown prince Mohammed bin Salman, after which Trump said that the three leaders would “get together.”

“I never thought I would be saying this: Maybe we do have to have an oil increase," Trump said on Fox News. “Because we do. The price is so low now.”

Related: Russia’s Plan To Bankrupt U.S. Shale Could Send Oil To $60 Meanwhile, some U.S. shale drillers and Texas regulators have raised the prospect of participating. Pioneer Natural Resources and Parsley Energy have called for some sort of global negotiated settlement, which would include Texas regulators instituting mandatory production cuts. 

For now, there is little sign that the U.S. will be able to convince Saudi Arabia or Russia to change course. 

OPEC has been unable to agree to hold an emergency meeting, suggesting that the group has no intention to cut production anytime soon. 

Saudi Arabia likely sees little benefit to backing off its new strategy of flooding the market. In fact, Riyadh may now view additional volumes as critical to its budget with prices so low. “Saudi Arabia now needs to produce 13m bl/day and export 10-11m bl/day which, together with government spending cuts of 20-30%, will bring down its social break-even towards $50/bl,” Bjarne Schieldrop, chief commodities analyst at SEB, said in a report. “Lifting Saudi Aramco’s production capacity to 13m bl/day is not a threat, it is a need.”

“The market is hoping for too much if it is now expecting Saudi Arabia to cut production aggressively again once we are on the other side of the Q2 2020 oil market disaster and price trough,” Schieldrop said. 

On April 5, Aramco will publish its prices for May, which will offer a major signal regarding Riyadh’s intentions. 

The thrashing around by the U.S. government, oil regulators and even some shale companies reveals their lack of leverage. They are throwing a lot at the wall and trying to see what sticks. As Liam Denning put it in Bloomberg Opinion: “The long arc of the American dream of energy independence, having recently soared Icarus-like toward energy dominance, has finally crashed ignominiously into energy incoherence.”

At the same time, Russia and Saudi Arabia won’t escape unscathed. Goldman Sachs says that Russia may also face shut-ins. “Russia will likely be required to shut-in production given the inland nature of its production and the decline in refinery runs happening in its European pipeline export market,” the investment bank said. Moscow may want to get ahead of this problem and use it as a carrot to entice cuts from elsewhere. 

Related: The Shadow War Playing Out Behind The COVID-19 Crisis

Riyadh also has immense budgetary pressure from low prices. For now, the Saudi government is targeting volumes over price, but that may not last forever. Perhaps the one piece of leverage the U.S. has is threatening other parts of the American-Saudi relationship. North Dakota Senator Kevin Cramer has proposed pulling U.S. troops out of the Middle East as a way of applying pressure on Riyadh. 

Because of these dynamics, some see a slight possibility of an international arrangement. “[W]hile coming to such an agreement remains difficult, signs of policy discussions are multiplying and we believe such an outcome should no longer be dismissed,” Goldman concluded. 

But given the size of the demand shock, the attempts to negotiate are “likely too little too late” for the oil market, Goldman concluded. 

By Nick Cunningham for Oilprice.com

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Leave a comment
  • Interested InOil on April 02 2020 said:
    Well,

    there are tariffs which could be applied temporarily to limit the utter destruction of Americas oil industry. If applied and gradually faced out could provide a time based buffer for US companies to deal with the shock at a time of great stress.

    Another, more extreme weapon, would be to sanction Aramco and make it harder for them to find a buyer willing to risk taking delivery.

    None of this is good in any way-shape-or-form but extreme times require extreme measures.
    The timing of this price war is a clear sign that Saudi Arabia has thrown the gauntlet at Trump.

    Ps. While I love low oil prices in general, sub zero prizes are just insane and a sign that the market for the time being is broken.
  • Mamdouh Salameh on April 02 2020 said:
    I start with the premises that the so-called oil price war and the Saudi threat of flooding the global oil market with oil starting early May are phoney. Therefore, analysts, investment banks and oil traders should stop swallowing Saudi claims hook, line and sinker.

    How could an oil price war work in a global oil market that has reportedly lost more than 20 million barrels a day (mbd) because of the coronavirus outbreak and a glut estimated by some accounts to have risen to 1.8 billion barrels. Moreover, it is not Russia that started the price war. The blame falls fairly and squarely on Saudi Arabia.

    As for the Saudi threat to flood the global oil market with oil, this is merely a disinformation. Saudi Arabia has never ever in its history had a production capacity of 12 mbd and will never ever achieve one either given that its current production comes from five giant but aging and fast-depleting oilfields discovered more than 70 years ago. I challenge anybody to provide any evidence to prove me wrong. Any rise in Saudi oil exports above 7 mbd will have to come mostly from storage which the Saudis can make use of for a very short time before depleting it.

    Even discussions between the United States, Russia and Saudi Arabia might not stabilize the oil market and prices until the coronavirus outbreak is controlled.

    The United States wants an end to the phoney price war to save its shale oil industry from collapse. It also wants higher prices up to $60 a barrel to ensure that US shale producers could cover their breakeven prices estimated to range from $48-$68.

    Russia, on the other hand, wants a substantial reduction in US shale oil production. Saudi Arabia, like Russia, wants a substantial reduction in shale oil production and prices exceeding $60 though it prefers prices above $85 to balance its budget before it ends its price war.

    The question is can these varied interests be reconciled. I don’t think so for one minute.

    If the United States wants to enlist Russia’s and Saudi Arabia’s help to stave off the collapse of its shale oil industry, there will have to be a quid pro quo. Russia would demand a lifting of some of the US sanctions against it particularly those on the Nord Stream 2 gas pipeline and also a substantial reduction in shale oil production. Saudi Arabia will also ask also for a substantial reduction in shale oil production.

    I don’t think that President Trump will agree to a major cut in shale oil production.The chances of US Congress agreeing to lift some sanctions on Russia and the US shale oil industry agreeing major production cuts are virtually nil. However, US shale oil producers might decide unilaterally to do exactly that.

    As for the US shale oil industry, it may stay alive longer on a life support machine provided by the Trump administration. It will never be allowed to die because of its economic and strategic importance to the United States.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Seth D on April 02 2020 said:
    Claiming Shale will die based on the temporary circumstances of a global Pandemic is nonsensical. The last time Russia and the Saudis tried to crush Shale, two things happened. First of all, Shale producers figured out how to extract oil much more cheaply and second, Russia and Saudi Arabia went into debt, with such unsustainably low prices.

    Once the Pandemic is over, we'll see Shale resume the role of keeping prices lower for consumers, and keeping bad state actors like Russia and Saudi Arabia from having unlimited funds to finance global mischief.
  • Bradley Steeg on April 02 2020 said:
    An outstanding quote in this article:

    "The long arc of the American dream of energy independence, having recently soared Icarus-like toward energy dominance, has finally crashed ignominiously into energy incoherence."

    I read another great quote on OilPrice.com a couple days ago:

    "Companies go bankrupt. Rocks don't go bankrupt."
  • Lee James on April 05 2020 said:
    An oil industry subsidized by certain investors is not a going concern in my book. We need to become energy independent in other ways. As usual: energy efficiency and sound management is a cornerstone. Newer in our portfolio of options are EVs.

    Thank you for all the past oil that we've burned. But let's do something different going forward! For another rationale to switch off of petroleum, how much is it worth to stop fighting and occupyin' over other people's oil?

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