OPEC + Russia + Demand Trap

[Douglas Buckland + 6,308]

“OPEC+ facing demand “trap.”Moscow has balked at deeper production cuts not only because it has a stronger stomach for lower prices than Riyadh, but also because the oil market is suffering from a demand trap. That is, restraining supply may not rescue prices when global oil demand has fallen so sharply.“

So let me see if I have this right...with the caveat that supposedly the oil market is over-supplied as we speak.

Russia refuses to cut production simply because they can supposedly sell more oil, at a lower price, and still meet all of their financial and social responsibilities. The Saudis apparently needs a much better price to meet their social and financial responsibilities.

On top of this, we now have a ‘demand trap’ where demand is falling in an already over-supplied market.

Why would any rational oil producing country NOT agree to cut production?

First, if demand is dropping in an over-supplied market, why keep producing oil you may not be able to sell, regardless of the price?

Secondly, why keep flooding an over-supplied market? This simply guarantees that whatever you produce, assuming that you can find a buyer now, will be sold at a lower price!

It sounds to me that this whole OPEC+ thing has devolved into a pissing contest between Russia and OPEC.

[Boat + 1,315]

I agree, the most polluting  oil extracting process is tar sands. We have a large trade imbalance with Canada. Common sense says take 3 mbpd off the world market and end the silly idea of more pipelines to the gulf. That should keep both the Saudi and the Russians happy which so many of you are so concerned about. 
Giving up tar sands to clean up the world air could be used as a trade off for killing coal plants. You listening globalists? Work a plan.

[0R0 + 6,251]

22 hours ago, Boat said:

I agree, the most polluting  oil extracting process is tar sands. We have a large trade imbalance with Canada. Common sense says take 3 mbpd off the world market and end the silly idea of more pipelines to the gulf. That should keep both the Saudi and the Russians happy which so many of you are so concerned about. 
Giving up tar sands to clean up the world air could be used as a trade off for killing coal plants. You listening globalists? Work a plan.

Useless idea. Tar sands are now quite cheap to produce when combined with LTO. Make an excellent blend.

Let Russia and Saudi duke it out. Load your SPR and be happy with it. 

[Boat + 1,315]

3 hours ago, 0R0 said:

Useless idea. Tar sands are now quite cheap to produce when combined with LTO. Make an excellent blend.

Let Russia and Saudi duke it out. Load your SPR and be happy with it. 

You apparently don’t follow oil much. The Saudi and Russia collide to cut production and raise prices for consumers. 
The reason tar sands are so cheap is they require the most refining to get rid of sulfur and other nasty crap.This nasty crap also has to travel over US soil and water with little to no compensation for affected residents when there is a problem. 
Will it be burning Burnie to shut down this environmental risk?

[Douglas Buckland + 6,308]

 

“You apparently don’t follow oil much. The Saudi and Russia collide to cut production and raise prices for consumers. “

 

I don’t think they ‘collide’ so much as ‘collude’. That said, you may have been correct right up to the meeting yesterday when they decided NOT to collude.

 

Things are going to s**t as we ‘speak’.

[Tomasz + 1,608]

Dear American colleagues, shale is now not a problem for other big oil producers because even at a price of 60-65 dollars, their growth will slow down significantly over the next few years.

Permian will probably grow but other shale oil deposits are in decline or flattening.

Shale is also being hit by a very low gas price, which is an increasingly important part of shale oil production.

The real problem now is not shale I agree with Doug that there is a significant decline in demand for oil and looming global recession.

Only I can really name at least half of the world's major oil producers who have a bigger problem than Russia or Saudi Arabia.

Apart from the obvious choice like Venezuela, we are talking about Algeria, Angola, Nigeria when it comes to African countries, Iraq, Mexico or Colombia.

It just so happens that the Russians have been in a situation of war economy for last 5 years and has done a lot to be definitely less susceptible to oil swings than it was in 2014.  

This is a economy war mentality because what can you call such increases in financial reserves at not particularly high oil prices.

At present, Russia is one of the very few countries in the world whose financial reserves are higher than the total level of foreign debt - they are debt free. There is about 6 such countries in the world.

It has carried out a very painful process of debt deleveraging  and is relatively well prepared for the global economic crisis

And the world was already close to recession before the outbreak of the epidemic - it so happens that tradingeconomics tracks the economic results of European Union countries and the results were in 2019 from month to month getting worse and worse

Why Russia is less afraid of the global financial crisis - because the crisis means a decrease in financial loans to emerging economies - but Russia is already subject to strict financial Western sanctions and in a strategic alliance with China at the some time.

It has a  a economy somewhat isolated from the world economy. This forced sanctions and the introduction of a free float currency

Russia has been preparing for the global financial crisis for several years and therefore has accumulated financial reserves at the level of an additional new $ 220 billion for the last three years.

That is why she buys gold as crazy and increases the annual production of gold and all precious metals by several percent per year, even though he is one of their largest producers.

Russia counts that the eventual crisis, like any crisis, will hit the most indebted countries and it happens that it is rather the West than Russia and China

 Biggest changes in russian economy during last decade was very strict tightening financial belts, extremally conservative fiscal policy, free float currency massive debt deveraging and dedollarization of economy. Buying gold for dollars.

True war mentality and waiting for global recession.

 

Lets also look on Saudi Arabia currency reserves

 

https://www.ceicdata.com/en/indicator/saudi-arabia/foreign-exchange-reserves

 

Edited March 8, 2020 by Tomasz

[0R0 + 6,251]

1 hour ago, Tomasz said:

Dear American colleagues, shale is now not a problem for other big oil producers because even at a price of 60-65 dollars, their growth will slow down significantly over the next few years.

Permian will probably grow but other shale oil deposits are in decline or flattening.

Shale is also being hit by a very low gas price, which is an increasingly important part of shale oil production.

The real problem now is not shale I agree with Doug that there is a significant decline in demand for oil and looming global recession.

Only I can really name at least half of the world's major oil producers who have a bigger problem than Russia or Saudi Arabia.

Apart from the obvious choice like Venezuela, we are talking about Algeria, Angola, Nigeria when it comes to African countries, Iraq, Mexico or Colombia.

It just so happens that the Russians have been in a situation of war economy for last 5 years and has done a lot to be definitely less susceptible to oil swings than it was in 2014.  

This is a economy war mentality because what can you call such increases in financial reserves at not particularly high oil prices.

At present, Russia is one of the very few countries in the world whose financial reserves are higher than the total level of foreign debt - they are debt free. There is about 6 such countries in the world.

It has carried out a very painful process of debt deleveraging  and is relatively well prepared for the global economic crisis

And the world was already close to recession before the outbreak of the epidemic - it so happens that tradingeconomics tracks the economic results of European Union countries and the results were in 2019 from month to month getting worse and worse

Why Russia is less afraid of the global financial crisis - because the crisis means a decrease in financial loans to emerging economies - but Russia is already subject to strict financial Western sanctions and in a strategic alliance with China at the some time.

It has a  a economy somewhat isolated from the world economy. This forced sanctions and the introduction of a free float currency

Russia has been preparing for the global financial crisis for several years and therefore has accumulated financial reserves at the level of an additional new $ 220 billion for the last three years.

That is why she buys gold as crazy and increases the annual production of gold and all precious metals by several percent per year, even though he is one of their largest producers.

Russia counts that the eventual crisis, like any crisis, will hit the most indebted countries and it happens that it is rather the West than Russia and China

 Biggest changes in russian economy during last decade was very strict tightening financial belts, extremally conservative fiscal policy, free float currency massive debt deveraging and dedollarization of economy. Buying gold for dollars.

True war mentality and waiting for global recession.

 

Lets also look on Saudi Arabia currency reserves

 

https://www.ceicdata.com/en/indicator/saudi-arabia/foreign-exchange-reserves

 

Saudi's main asset is its sovereign fund, not the reserves. It also holds a large amount of gold in the Saudi royal family coffers. They have little debt. What they do have is a heavy social welfare burden. 

Contrary to what you are thinking, China is the most leveraged country on the planet ever. What is true is that its foreign debt is balanced with its official reserves. But those reserves are partially rehypothecated so are not entirely free. The amount at the Fed is $1 Trillion of the $3+ T. 

I think you need to recheck your thinking. Saudi has an estimated $1 T free and clear, Russia has a net of $100 B

That is not enough to hold Russia together with 1/3 the revenue, which appears to be Saudi's target in chasing them with an ask under the Russia pricing. 

Saudi mean business. They intend to bring the Russians back to the table and to their way of controlling oil prices. The Russian attitude is mistaken. They assume that US shale is a money loser and eats capital so when they get the companies into bankruptcy then Shale production will drop and the companies won't revive. It is exactly the opposite. The defunct companies will have been freed of lease terms to negotiate better conditions and their debt turned to equity so that they can use all of their cash flows to drill rather than pay interest - unless they only did a debt restructuring. With no debt and easier lease terms, cash costs among the better frackers are at the $40 mark and some claim even better. Russia is not such a low cost producer and when it is, it is due to a low currency that makes their people's incomes into a joke. 

With  a Saudi target on their back, Russia is in trouble. But so is shale.  

[0R0 + 6,251]

2 hours ago, Boat said:

You apparently don’t follow oil much. The Saudi and Russia collide to cut production and raise prices for consumers. 
The reason tar sands are so cheap is they require the most refining to get rid of sulfur and other nasty crap.This nasty crap also has to travel over US soil and water with little to no compensation for affected residents when there is a problem. 
Will it be burning Burnie to shut down this environmental risk?

So you suggest we shut down tar sands so that consumers pay even more?

The environmental risk is small. The sulfur stays behind after refining. The pipelines I expect are to the Pacific and for US LTO to go North to blend with the tar sands crude to reduce refining costs and produce a better crude blend,  

[Douglas Buckland + 6,308]

 

With  a Saudi target on their back, Russia is in trouble. But so is shale.  

 

Russia is also VERY vulnerable to the Saudi’s tactic of crashing the oil price. The Russian economy is BASED on oil. Granted, the Saudi economy is strictly oil based as well. It will be interesting to see who blinks first.

 

The collateral damage globally is likely to be severe. Regardless of the outcome, Russia and Saudi will become pariahs in the global community. Due to the Chinese government’s handling of the corona virus issue and the ripple effects globally, they are well on their way to reaching pariah status as well.

[Douglas Buckland + 6,308]

19 minutes ago, 0R0 said:

So you suggest we shut down tar sands so that consumers pay even more?

The environmental risk is small. The sulfur stays behind after refining. The pipelines I expect are to the Pacific and for US LTO to go North to blend with the tar sands crude to reduce refining costs and produce a better crude blend,  

Furthermore, sulfur is not a waste product.

[Tom Kirkman + 8,860]

24 minutes ago, Douglas Buckland said:

The Russian economy is BASED on oil. Granted, the Saudi economy is strictly oil based as well. It will be interesting to see who blinks first.

^ this

I suspect MbS will blink first, as MbS is underestimating Putin.  And so many princes in KSA want MbS' head removed from his shoulders, while Putin remains immensely popular with his citizens.

MbS will be under more pressure than Putin, so I fully expect MbS to cave.

[BenFranklin'sSpectacles + 762]

On 3/6/2020 at 11:24 PM, Douglas Buckland said:

“OPEC+ facing demand “trap.”Moscow has balked at deeper production cuts not only because it has a stronger stomach for lower prices than Riyadh, but also because the oil market is suffering from a demand trap. That is, restraining supply may not rescue prices when global oil demand has fallen so sharply.“

So let me see if I have this right...with the caveat that supposedly the oil market is over-supplied as we speak.

Russia refuses to cut production simply because they can supposedly sell more oil, at a lower price, and still meet all of their financial and social responsibilities. The Saudis apparently needs a much better price to meet their social and financial responsibilities.

On top of this, we now have a ‘demand trap’ where demand is falling in an already over-supplied market.

Why would any rational oil producing country NOT agree to cut production?

First, if demand is dropping in an over-supplied market, why keep producing oil you may not be able to sell, regardless of the price?

Secondly, why keep flooding an over-supplied market? This simply guarantees that whatever you produce, assuming that you can find a buyer now, will be sold at a lower price!

It sounds to me that this whole OPEC+ thing has devolved into a pissing contest between Russia and OPEC.

They're going for the kill.  With oil prices so low, entire countries will start going bankrupt, disrupting their oil production.  As has been pointed out to me, this plus falling demand creates a scenario where:
1) Oil prices oscillate between extremely high and extremely low values.
2) No one invests in new oil production.
Whoever survives this price war inherits a market where prices are high and competition is limited. 

Why would Saudi Arabia go for the kill?  Because they ran the numbers and realized they're financially screwed.  This is a last, desperate attempt to avoid oblivion - and it's going to be hilarious to watch. 

[Douglas Buckland + 6,308]

1 hour ago, Tom Kirkman said:

^ this

I suspect MbS will blink first, as MbS is underestimating Putin.  And so many princes in KSA want MbS' head removed from his shoulders, while Putin remains immensely popular with his citizens.

MbS will be under more pressure than Putin, so I fully expect MbS to cave.

Regardless who caves in first, the world will once again be swamped with low cost oil, in an already swamped market, while Chinese demand recovers.

It is not looking good for ANY of us in the oil business for the foreseeable future.

[Tom Kirkman + 8,860]

6 hours ago, Tom Kirkman said:

I suspect MbS will blink first, as MbS is underestimating Putin.  And so many princes in KSA want MbS' head removed from his shoulders, while Putin remains immensely popular with his citizens.

MbS will be under more pressure than Putin, so I fully expect MbS to cave.

< cough >

So far, Putin 1, MbS 0

Aramco trades below IPO price for first time, after OPEC pact unravels

DUBAI (Reuters) - Shares of Saudi state oil company Aramco (2222.SE) slumped below their initial public offering (IPO) price on Sunday for the first time since they began trading in December, after OPEC’s pact with Russia to restrict oil supplies fell apart on Friday.

Aramco shares were down 6.2% at 30.85 riyals ($8.22) at 0852 GMT, their sharpest percentage fall in a day, and below the IPO price of 32 riyals. The Saudi market .TASI was down 7.4%.

Aramco’s record IPO in December gave it a price tag of $1.7 trillion, making it the world’s most valuable company. The stock hit an intraday high of 38.70 riyals on its second day of trading, but has eased since then.

The shares have fallen more than 11% since the start of the year amid concerns the coronavirus outbreak will slow oil demand from China and hurt the global economy.

Oil prices have also slumped, and fell further on Friday after a three-year pact between OPEC and Russia aimed at supporting the market ended in acrimony when Moscow refused to back deeper production cuts. OPEC responded by removing all limits on its own production. [O/R]

“Aramco is under pressure because of the failure of the deal,” said Marie Salem, head of institutions at Daman Securities.  ...

[Tomasz + 1,608]

https://www.intellinews.com/macro-advisor-oil-war-who-will-blink-first-178033/?source=russia

By Chris Weafer of Macro-Advisory March 8, 2020

Quote

 

When Russia refused to back Saudi Arabia’s proposal for a deeper oil production cut in Vienna on March 6, it effectively fired the first shot in what looks like being an expensive and prolonged oil price war.

Against the backdrop of the Covid-19 crisis, which looks set to cut at least 2mn barrels of daily global demand, at least through 1H20, there is only one conclusion to be made: the price of Brent will test the low of early January 2016 when it briefly dipped below $30 per barrel (p/bbl)

At last week’s meeting, Russia only offered to extend the existing OPEC+ deal, which is set to expire at the end of this month, for a three further months and then to assess the situation. Saudi Arabia wanted Russia to participate in cutting an additional 1.5mn barrels per day (bbl/d) through Q2 in order to try and balance the global oil market. Having been rejected by Moscow, Saudi has responded very quickly with an announcement that it has no intention of extending the current deal and will “open up the oil taps” from April 1. It is already reported that the Kingdom is offering discounted oil.

At first glance, this looks like a battle between Russia and Saudi over oil policy. But the context of the relentless rise in US oil production over the past ten years is also an important factor. Both Russia and the major OPEC producers have been openly annoyed with the refusal of the US producers to participate in past production cuts and the fact that the US industry has been the major beneficiary of the price support mechanisms. It is a stretch to say that Moscow and Riyadh are in any sort of cooperation to try and reduce US oil production; the body language at the Vienna meeting strongly suggests otherwise. But if a price war results in some US casualties and a greater reluctance by investors and lenders to fund future US marginal production, then Moscow and OPEC will be relieved.

The table below shows the steady rise in US production over the past 10 years, from an average of 7.5mn bbl/d in 2008 to an average of 17.1mn bbl/d last year. US production averaged 18.4mn bbl/d in 3Q19 according to International Energy Agency (IEA) data - and using its methodology, which also captures other oil liquids as well as crude. That means that US market share has risen from under 9% to over 17% in the period. Saudi and Russia market shares have held steady in this period mainly because of the US sanctions against Iran and Venezuela and disruptions in Libya and Nigeria, all of, which have removed at least 4mn bbl/d from the global market.

It also raises the concern over who may next be subject to US oil sanctions if US production continues to rise and wants to displace other producers in the global market? There are at least a few in Moscow and Riyadh who have raised that question.

So, who is best positioned to fight an oil war and to live with $30 per barrel Brent, or even lower?

Moscow has bigger financial reserves than Saudi Arabia. Saudi Arabia holds the equivalent of $495bn as of end January while the latest figures from the Russian Central Bank show reserves at $570bn as of end February.

Saudi’s reserves have been declining during the last several years of oil price weakness and are down from a peak of $731bn at end 2014. Russia’s reserves have been growing and are up $100bn since January 2019 and are $190bn higher than the low of early 2017.

Russia has had to allow the ruble free-float from early 2015. This was a policy forced on the Kremlin as a result of the combination of western sanctions and low oil. That has turned out to be a major silver-living for the budget, as well as for economic competitiveness, and it means that the budget break-even oil price moves lower as the ruble weakens. Assuming the ruble-dollar exchange rate drops below 70 then the breakeven will drop to $45 per barrel. If the ruble-dollar rate hits 75 then the budget will breakeven around $40 per barrel without any cuts to current planned spending. This compares with a breakeven of $115 per barrel in 2013.

Saudi Arabia reportedly needs $85 per barrel to balance its budget and does not gain from a currency offset as the Riyal is pegged to the dollar.

Russian oil producers now have a very low production cost, exactly for the same reason of the ruble flexibility and also efficiency gains that the industry also had to adopt because of western sanctions.

President Putin will not have to worry about any political fallout amongst Russia’s so-called elites because of this action. It has been known for some that some of the powerful state oil executives have opposed the extension of the OPEC+ deal and wanted it ended. Rosneft, who’s 4.2mn bbl/d output is second only to Aramco’s 10mn bbl/d, has made no secret of its frustration with the deal and its desire to push ahead with new projects. After the recent US sanctions against a Rosneft Swiss trading arm, which the US accused of helping Venezuela sell oil, its powerful CEO, Igor Sechin, will not lose any sleep over damage caused to marginal US producers.

The same cannot be so confidently said of Saudi Arabia. Crown Prince Mohammed clashed with the former long-standing oil Minister Ali Al-Naimi over production policy. Naimi advocated a high-production policy to kill off competition while the Crown Prince wanted the OPEC+ deal. Naimi was fired from the post in 2016 and just ahead of the first OPEC-Russia deal. The fact that the Crown Prince has had senior royals, and potential competitors, arrested exactly as the OPEC+ deal was falling apart, is not likely to be a coincidence.

Who blinks first?

The oil price and oil producers will inevitably endure a bloody few months at least. The price of Brent will almost certainly test the early 2016 low of $30 p/bbl and this could it could be worse given the Covid-19 effect.

President Putin will not want to start scaling back budget spending, especially for the flagship national projects programme, a very ambitious $400bn programme to transform the economy and people’s living conditions by the end of his presidential term in May 2024. He will also not want to scale back on the promised social programmes and family supports that were a big part of his Federal Assembly Address in January. Especially not as public trust in his leadership has fallen to 35%, from 60% only two years ago.

If the oil price is still trading in, for example, the $20 to $30 p/bbl range in the summer, then this may change. Putin will be just as reluctant to run a big budget deficit or to reduce financial, reserves to a low level. That would leave the country vulnerable to future sanctions.

The hope in both Moscow and Riyadh is probably that either is forced to blink first and return to the negotiating table. The ideal scenario for both is that the marginal or high-cost oil producers quickly feel the pain and are forced to shutter production. It really is a waiting game and a test of both political nerve and financial reserves. The closing shoot-out scene of the spaghetti western,” The Good, The Bad, and The Ugly” comes to mind. But, whatever about the US producers, this time round Russia and President Putin are in a better position to fight this war than is Saudi Arabia or its Crown Prince.

 

 

[Tomasz + 1,608]

5 hours ago, Douglas Buckland said:

Regardless who caves in first, the world will once again be swamped with low cost oil, in an already swamped market, while Chinese demand recovers.

It is not looking good for ANY of us in the oil business for the foreseeable future.

I would not be such a pessimist, mainly because we are currently in 2020 and not 2014.

In the period to 2014 we had the highest investments in the oil sector in history.

After 2014, investments outside shale oil sector collapsed.

In OPEC alone, the vast majority of countries are unable to increase production, rather they are in a state of decline in production.

Generally, we are after the conventional oil peak stage, the entire production increase is unconventional oil.

We are facing difficult months, but the decline in investment should be clearly visible starting from 2021.

I think marginal cost of barrel is about 60 $. Thats full price cost in Permian  current swing producer.

Its the only deposit of shale oil in the USA in which production will grow in the near future

Edited March 8, 2020 by Tomasz