Sub-$30 Brent looming on Opec+ tension
Wide differences in strategy, breakeven prices and national finances all contributed to failure to agree production cuts in face of US shale competition and sagging demand
Brent crude prices could decline further to less than $30/bl if the differences between Saudi Arabia and Russia cannot be overcome, experts warn. In the absence of a reversion to cooperation, many observers expect Saudi Arabia to ramp up output to 11mn bl/d—despite huge political tension in the country’s ruling elite.
The two countries have hardened their positions since their alliance of more than three years collapsed on Friday with Riyadh announcing over the weekend that it would cut its export prices by up to $8/bl for some customers and ramp up production. Not only did Opec and Russia fail to negotiate a fresh output cut of 1.5mn bl/d on Friday, but existing cuts of 1.7mn bl/d expire at the end of the month and may not be renewed. Oil prices suffered their biggest daily decline in almost three decades with Brent futures dropping about 30pc.
The Saudi strategy is fraught with internal political risk. Saudi Crown Prince Mohammed bin Salman (MbS) has embarked on his boldest-to-date purge of opponents inside his family, arresting a brother of King Salman and several of his relatives and charging them with treason, according to media reports over the weekend.
Embroiled in a bitter geopolitical rivalry with Iran, including a protracted proxy war in Yemen, and struggling to diversify its economy amid sagging oil prices, the crown prince is likely wary of a palace coup, experts say.
Russia may be losing between $100mn and $150mn per day from the failure to reach an agreement with Opec
“I would imagine that it is […] a case of a perfect storm for MbS, facing a number of external challenges,” says Simon Mabon, an international relations expert at Lancaster University, adding that the move appears designed to shore up his domestic standing and “eradicate internal threats”.
Russia, too, is hurting, though Russian officials have sought to put a brave face on it. Its National Wealth Fund of the country has $150bn of reserves that can cushion the impact of a plunge in oil prices for up to a decade, the ministry of finance told local media.
Nevertheless, Russia may be losing between $100mn and $150mn per day from the failure to reach an agreement with Opec, according to media comments by Leonid Fedun, the co-owner of its privately-owned oil giant Lukoil.
Both Russia and Saudi Arabia are wary of US shale producers despite their higher output costs and breakeven prices of more than $50/bl leaving them vulnerable to a low oil prices. Riyadh tried, and failed, to sink the US shale boom by driving crude prices down in the mid-2010s, leading to the production-cut deal with Russia in 2016.
Moscow appears eager to try again, likely hoping that the impact of the Covid-19 epidemic may not be as severe as the markets fear and banking that it may have some leverage over Libya’s output of c1.2mn bl/d, which has been taken offline in recent weeks due to conflict. Russia is the main patron of warlord Khalifa Haftar, commander of the Libyan National Army (LNA).
While US producers typically have higher break-even prices for their barrels, they are also likely to have financial market instruments in place to protect themselves against volatility—if so they can continue operating profitably at least for the short term.
“Most US shale producers could be okay for a few months as although many are highly indebted, their debts tend to be hedged against a sharp price drop,” says Sarah Fowler, an international economy expert at Oxford Analytica, a UK-based consultancy. "Saudi Arabia and Russia can cope in the short term with prices below $40 and may wait to see for how long and by how much the coronavirus outbreak affects global growth and oil demand before reviewing the situation at the June Opec+ meeting.”
She says that the smaller producers are likely to suffer more than the two dominant players. “The price drop plunges the smaller Opec+ producers such as Nigeria and Angola and other African countries into the most immediate peril as these countries have less ability to raise output or to plug immediate budget gaps."
Oil markets, and the global economy, are coping with a double shock. Global panic about the Covid-19 respiratory virus spreading out of China— afflicting more than 100,000 people and killing more than 3,000 around the world—had already decimated demand expectations. Chinese crude demand declined 3-4mn bl/d in recent weeks, estimates show.