Saudi-Russia Oil Price Deal Delayed; Oil Prices Fall After Last Week’s Recovery

The US benchmark, Western Texas Intermediate future, traded at US$27.18 on 6 April 2020 at 2:13 PM AEST.

WTI Oil Futures Price Source: Refintiv Eikon

Russia-Saudi Arabia Meeting Postponed

Ever since 8 March 2020, the additional downward force of the growing oversupply has been plaguing the Crude oil prices. The demand had dipped following the Coronavirus outbreak forcing major economies to go in quarantine and enforcing the seemingly perpetual travel ban.

The two countries were part of the early March OPEC+ meet which aimed at cutting down the production to lower the global oil supply in times of reduced demand.

The US Shows onset of Massive Chapter 11 filings

The recovery in Oil prices was essential as the US shale oil producers approached bankruptcy. Last week, NYSE listed Whiting Petroleum, once North Dakota’s largest oil producer, filed for Chapter 11 bankruptcy.

After extensive negotiations, Whiting has managed to reduce the debt levels by US$2.2 billion on behalf of exchange of notes for 97% of new equity. The existing shareholders will be restricted to only 3% of the reorganised company.

The US knows that this is the story of almost all major shale gas providers, that are almost trading around their breakeven prices. It was reported that only a few shale drillers were profitable at the WTI prices of US$31 a barrel on 10 March, with the WTI prices sliding even further to almost around the US$20 a barrel level. The times are grim and require immediate support from the US government and the global oil producers such as the OPEC+ and OECD.

It is believed that several other shale oil producers from Texas and North Dakota, the largest oil-producing states of the US are approaching bankruptcy.

The US government announced large scale purchases to uplift the domestic demand filling its emergency inventories stockpile by almost 80 million barrels of Crude oil. This was the government’s way to motivate the domestic players that had been losing hope and require quick and permanent resolution to the escalating issues.

Trump’s Tweet: A Premature Action by The World’s Most Powerful Man

President of the US, Mr Donald Trump, tweeted about an alleged conversation with the Saudi Crown Prince Mohammed bin Salman bin Abdulaziz Al Saud, popularly known as MBS, discussing the issue. Mr Trump further added that MBS discussed with the Russian counterpart Vladimir Putin and their mutual agreement on cutting the supply by 10 million barrels or more, which would reignite the world’s fuel industry.

On 2 April 2020, in response to the tweet, the crude oil prices experienced a massive 35% recovery glittering the revival of the oil producers worldwide.

Trump, quite infamous for his premature tweeting issues, was backed by Saudi Press Agency which tweeted on the same day mentioning the oil-rich nation’s agreement to an OPEC+ meeting to find a reasonable solution to the escalating matter.

It seems that the Price war announced by the US ally Saudi Arabia on 8 March, following disagreement by Russia on cutting down production, and Saudi, in retaliation, increasing its own oil production to around 12 million barrels per day is affecting the US much worse than Russia.

Healthy or Economic Penalty: Different Country Different Choices

Donald Trump has not yet called out for an official quarantine, even after the total confirmed cases in the US crossed 3,37,000 people, with the world’s financial capital, the New York City, now more like the World’s coronavirus capital with over 67,000 cases. It is believed that Mr Trump is trying to delay another 2008-like recession.

The US Might enforce Tariff to protect Domestic Oil Industry

US President Donald Trump now, ramping up his threats stated that he might apply hefty taxes on the imported oil to support the US domestic oil industry. Mr Trump reiterated that Saudi and Russia would be able to sort out the month-long dispute, but in the absence of a resolution, he might have to enforce the tax on the imported oil.

He also told that an application of such high tariffs would help generate thousands of jobs in the domestic oil industry and shutting the doors for the foreign oil producers almost completely.

Belarus enters oil contract with Russia for US$4 per barrel for April

Belarus, the forced Soviet Republic, reached an agreement with the Russian refineries for US$4 per barrel in April. Earlier in 2020, Belarus ceased the Oil purchase from Russia demanding a change in the Oil pricing formula.

US$4 barrel seems to be an extremely low price, and the fact that the Russians are open for business even at those prices is astonishing. We are not sure if this is just a gimmick, but Belarus’ Prime Minister Sergey Rumas confirmed the same. Either the Russians are prepared for a full-scale oil price war or the deal is a marketing gimmick to showcase the same, anyways the World leaders need to resolve the situation soon and efficiently.

Good News for Oil Importers: India, Japan and Australia

Oil mongers such as India, Japan and Australia can easily take advantage of the ongoing oil dispute, filling up their inventories at the lowest oil prices. India, the world’s third-largest oil consumer, imports almost 80% of its total oil and seems to be unable to take advantage of the situation as the world’s second-most populous nation is under a 21-day nationwide quarantine leading to a sharp decline in the oil demand. Australia, which is an importer of crude oil, is also an exporter of many oil-linked commodities. This could be very beneficial for the country in the short term, but if the ongoing dispute prolongs, it might have an adverse impact on the country’s economy mostly due to a decline in LNG prices, which is closely linked to the crude oil prices.