Strange bedfellows of Oil: Russia, Saudi Arabia and the United States

• Russia, Saudi Arabia and OPEC reportedly to cut production as demand crashes.
• United States and President Trump have encouraged the potential deal.
• North American shale drillers under severe price pressure.

Russia and Saudi Ara­bia find themselves in an unaccustomed position with oil markets hanging on every word of a potential production deal as they face a huge drop in global demand from the Coronavirus pandemic that could be as high as 20 million barrels per day.

Reuters reported on Monday that Russia was ready to agree to cut oil output substantially according to two Russian sources who did not provide precise numbers.  

The OPEC+ group, the cartel plus Russia is scheduled to hold a video conference on Thursday to discuss how to bolster oil prices.

Last Friday the Kremlin website posted a statement from Russian President Vladimir Putin, “According to preliminary estimates, I think that we can talk about a reduction in the volume of about 10 million barrels per day, a little less, maybe a little more.  Russian production was 11.29 million barrels per day in March.

Putin’s statement came a day after a tweet from US President Trump sent crude prices soaring. Thursday’s all-time 24.67% one day jump in the price for West Texas Intermediate (WTI, Clc1) came after the Trump’s assertion that the Saudis and the Russians would shortly end their price war with an agreement to cut production between 10 and 15 million barrels.

Crude price drop

CNBC

Crude prices had plummeted in late February and March. From the open of $53.50 on February 20^th just as the Coronavirus was becoming the global news story, WTI the US price standard, crossed every technical and fundamental barrier reaching an 18 year low of $19.46 on March 20.

Earlier in the month OPEC and Russia had failed to extend oil production cuts which expired on April 1. The disagreement led Saudi Arabia and the United Arab Emirates to threaten increased production, a warning answered by Russia with her own promise to ramp up pumping.  The war of threats sent prices, already under heavy pressure from the expected demand destruction, cascading lower.  The finances of both nations are heavily dependent on oil revenues.

The US finds itself in the unusual position of agreeing with its two largest oil competitors, countries its shale production had dethroned as the world’s leading driller, an achievement touted by the Trump administration.  Price pressures have made common cause.  

US shale production

North American shale production is a relatively expensive endeavor compared to the traditional drilling methods in the established fields of the Persian Gulf and Siberia.  Many US shale companies are heavily leveraged and a prolonged period of low prices could do serious damage to the industry. The bankruptcy rate would soar.   

Mr. Putin noted the new circumstances on Friday. He said that Russia is “ready for agreements with partners and within the framework of this mechanism - OPEC-plus — and we are ready for cooperation with the United States of America on this issue. I believe that it is necessary to combine efforts in order to balance the market and reduce production as a result of these coordinated efforts.”

The seeming agreement at OPEC+ and the encouragement of the United States have sent prices soaring. From the April 1 close at $20.31 to $26.13 on Tuesday morning in New York WTI has gained 30%.

Even for a market long inured to violent movement the turnaround among the major players has been remarkable.