Oil prices appear set to plummet when trading resumes on Monday as the ongoing dispute between Saudi Arabia and Russia raged on over the weekend. Despite remarks from Donald Trump last week that the two were nearing an agreement, forward progress on an arranged supply cut appeared to crumble over the weekend.
Ultimately, the two sides will have to reach a deal or risk an industry-wide collapse. But it will be a race against the clock as oversupply around the world threatens to bring the price of crude oil below $10 per barrel.
On Friday Saudi Arabia called for an emergency OPEC+ meeting, presumably to discuss the potential of a production cut. The meeting was due to take place on Monday, but was postponed over the weekend.
Notably, Russia has agreed to participate in the emergency OPEC+ meeting. It’s unclear when it will take place, but most expect it will happen later in the week.
At some point, Russia and Saudi Arabia will give up on trying to lay blame. Oil prices are plunging ever lower as demand continues to dry up amid coronavirus shutdowns. That is causing a storage issue that could eventually force production to shut down completely as there won’t be anywhere to store it.
Some estimate that scenario could play out as early as this month .
JP Morgan’s Bruce Kasman sees supply exceeding storage capacity a bit further into the future. He believes prices will fall below $10 if capacity is reached, but that producers can avoid a total collapse with an initial agreement for smaller supply cuts:
Modest supply cuts would help to alleviate looming storage constraints, which under existing supply/demand conditions could reach capacity by the end of summer, if not earlier.
Indeed, this week’s meeting is likely to yield some kind of compromise. At very least producers will probably strike a more positive tone regarding negotiations.
While the industry may be able to slow the bleeding, any agreement is likely to be small—just enough to avoid a collapse.
That’s because negotiating the kind of supply cut needed to stabilize the market in the face of coronavirus shutdowns would be monumental. It might even need to be larger than the 10-15 million barrels per day Donald Trump suggested was coming last week.
To be clear, a 10-15 million bpd cut is unlikely. Getting all of the world’s producers to agree on how much they’ll cut is a monumental task.
Eurasia Group’s Ayham Kamel pointed out that even on its own, OPEC finds negotiating production cuts challenging :
Divvying up cuts could get tricky—OPEC hasn’t even been able to get its own members and allies to adhere fully to agreements in the past year.
On Saturday, Donald Trump said he was considering tariffs on imported oil in order to stabilize the industry and protect U.S. jobs. The president is rightfully concerned about the hundreds of thousands of Americans working in the highly-leveraged U.S. oil industry. With prices at historic lows, many shale firms are about to go under.
If I have to do tariffs on oil coming from outside, or if I have to do something to protect thousands and tens of thousands of energy workers, and our great companies that produce all these jobs, I’ll do whatever I have to do
But that’s easier said than done. The president will struggle to get the rest of the government on board as the nation continues to grapple with the coronavirus pandemic. A bailout for the energy sector isn’t first on many lawmakers’ list of priorities.
Plus, there are geopolitical concerns as well. Just as with the trade war with China, imposing tariffs could prompt a sharp response from foreign producers. Retaliatory tariffs could hurt American businesses already struggling.
Trump is probably trying to instill confidence in the markets as oil prices nosedive following the false hope for a deal he injected last week. This week, Trump will probably send out more baseless tweets to hype up any potential deal between foreign producers.
It’s hard to believe that Saudi Arabia and Russia will risk running their own businesses into the ground in a game of chicken. There’s almost certainly a production cut agreement coming. But avoiding a total collapse and stabilizing oil prices for good are two different things. A production cut large enough to offset demand issues is still highly unlikely.