Below is a complimentary research note from Energy Policy analyst Joe McMonigle. If you are an institutional investor interested in accessing our research email sales@hedgeye.com
The brutal oil price war that started after the collapse of the OPEC+ talks in Vienna on March 6 may be subsiding amid recent notable signs from Russia, Saudi Arabia and now possible Trump intervention conveyed this week.
In our view, the most important potential catalyst is coming from Moscow where both the Kremlin Wednesday and Russian energy company Lukoil Thursday seem to be acknowledging a mulligan and conceding that the price crash is harmful and higher prices are necessary.
Russian Mulligan?
Kremlin spokesperson Dmitry Peskov said on a conference call with reporters on March 18: “Of course it’s a low price, we would like to see it higher. We’re very closely monitoring the situation on global oil markets, analyzing the situation, trying to make forecasts for the near- and mid-term future.”
Lukoil Vice President Leonid Fedun, in an interview Thursday with Russian business media outlet RBC, called the current oil price “disastrous” and said recent developments have surprised Russia. “Although I know that certain state-owned companies actively lobbied for it [the idea of withdrawing from the OPEC + deal]. Even those who lobbied could not imagine in a nightmare that they would sell oil at $25,” he said.
Argus Media also reported Thursday that Fedun said he was urging OPEC+ to revive its cooperation after Lukoil announced plans to cut capex by $1.5 billion this year. “We need to agree again. But for this it is necessary to overcome the pessimism of those who wrecked the deal,” adding that Russian oil output will start to decline from 2022-23 if prices remain below $35 per barrel, according to Argus.
Saudi Shipping Rebates to Discontinue & Uncertainty About Discounts
Bloomberg reported Thursday that Aramco started telling customers it will discontinue freight rebates in Apri. In addition, if oil prices decline further into the teens, the current $8-10 discount to the Saudi OSP will likely have to be altered. The change in freight rebates and OSP discounts may result in a temporary price recovery.
Possible June 9 OPEC Meeting Detente
OPEC canceled its March 18 Joint Technical Committee (JTC) meeting that Russia and Saudi Arabia normally attend. We think it’s unlikely to expect any meaningful developments or discussions between Saudi and Russia before the current production cut deal expires on March 31 – despite the urging from many OPEC and non-OPEC countries.
Instead, we see the next off-ramps in the price war to involve a slowly-evolving Russia mulligan, US persuasion with Saudi Arabia with signs of potential progress emerging in the lead up to the June 9 OPEC meeting.
But before either of these upcoming catalysts, we believe oil prices will continue to fall into the teens in the short term amid disaster demand destruction, building global stocks and no production limits after April 1.
Looking forward we see a growing probability of an oil price détente at the June OPEC meeting that may become apparent in late April or early May in the lead up to the meeting. We put the chances of a truce at 30 percent but rising in the weeks ahead. We realize this is probably a non-consensus view as many other analysts see the price war continuing through the end of the year or after the US election.
Trump Pivot on Low Oil Prices and Intervention Likely
In his daily COVID19 press conference, President Trump today took a significant pivot on oil prices from cheering lower oil prices to concern about US energy jobs losses and “hurting a great industry.”
In his comments on energy, Trump said “we are trying to find some kind of medium ground” adding that he “spoke to numerous people who have a lot to do with it and we have a lot of power over the situation.” Trump concluded his comments by saying “at the appropriate time, I’ll get involved.”
For now, the Administration is pursuing other measures like Thursday’s announced tender to purchase 30 million barrels of crude for the Strategic Petroleum Reserve (SPR) as well as potential economic assistance to the industry along with other sectors.
In reality, the US government does not have many tools available to counteract lower prices, but we are aware of internal discussions about the need for increased diplomacy to bring some stability back to oil markets.
President Trump emphasized getting involved “a the appropriate time” but we don’t think the administration will sit on the sidelines long as prices slide further.
One key catalyst for administration action may be on April 5 when the new Saudi official selling price (OSP) is disclosed. If prices fall further, we believe the administration will begin aggressively urging for an immediate off-ramp and reset for oil markets.
