We believe there are notable signs of potential off-ramps in the brutal oil price war from Russia, Saudi Arabia and now possible Trump intervention conveyed this past week.
In his daily COVID19 press conference on Thursday, President Trump 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 this week’s announcement of a 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 “at 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 jawboning in public and private for an immediate off-ramp and reset for oil markets.
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 and 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.
Now oil markets will also have to contend with the Trump factor.