By Barani Krishnan
Investing.com - Even for the Bond movie villain it’s been made out to be, Russia’s role in the disintegration of OPEC+ seemed surreal.
Forty-eight hours after its hold-out of support for deeper production cuts that could have mitigated more of the oil demand lost to the coronavirus crisis - and avoided Friday’s spectacular 10% collapse in crude prices - many were still in disbelief of the Moscow maneuver.
From Vienna, where oil’s most powerful government officials were gathered for Friday’s OPEC+ meeting, to the banks, brokerages and hedge funds on Wall Street and elsewhere, the question being asked was the same: “Why now?”
“I guess it was the Russians’ way of saying ‘Enough is enough - each time we cut output, it’s the U.S. shale drillers who benefit without doing anything’,” said Phil Flynn, senior market analyst for energy at the Price Futures Group brokerage in Chicago.
“To me, what the Russians are thinking makes perfect sense. I get it. What I don't get is why would they do it now? Especially in the context of today’s market dynamics, where you’re losing hundreds of thousands of barrels a day in demand, and $35 oil is beginning to look like a reality compared to $55 just weeks ago. That's why I'm asking: Are you sure you want to do this now?”
Since 2016, Russia has agreed to three production cut deals with OPEC kingpin Saudi Arabia. Their OPEC+ alliance, that included more than 20 countries, reduced about one million barrels per day on the average over the past three years. In that same span, the United States became the world’s biggest oil producer, turning out a record high of 13.1 million bpd as of last week.
That’s not at all. U.S. crude shipments have rocketed as well, making America a net oil exporter the first time in history, almost fulfilling its 40-year-long quest for energy independence. Just last week, U.S. crude exports reached more than 4 million bpd, matching a high from December.
It's an amazing transformation for a country that kept a ban on crude shipments for four decades until 2016, for fear of a squeeze at home should there be another 1970s-like supply shock. Not surprisingly, the Russians, who witnessed the volume of U.S. oil grow while they were in cutting mode, don’t think it’s a coincidence.
Thus, when the Russian-Saudi divorce came - just eight months after their energy ministers professed jokingly to be wedded for “eternity” - it wasn’t totally unexpected. Yet, the timing was a total surprise, given that the industry has been thrown into one of its worst periods of uncertainty, with common sense dictating that less, and not more, oil was needed.
Russian Energy Minister Alexander Novak, however, seemed unperturbed by such realities, telling news services in Moscow on Friday that signatories to OPEC+ were free to produce as they like once the group’s existing pact expired on March 31. Novak’s message was clear: We’re upping the ante. It’s up to you guys what you want to do.
Late on Saturday, Saudi Arabia responded, slashing the official selling price of its crude by the most in 20 years to make its oil more competitive. Privately, the kingdom also told its customers it could raise its production to well above 10 million barrels a day.
The stage now seems set for an all-out production war in oil, and only time will tell who will be the victor and who will be vanquished.
“Russia was content in being the Bond villain in what appears to be the last movie in the three-years series called OPEC+,” said Ed Moya of online trading platform OANDA.
“Russia's endgame could be to gain market share in 2021 when global demand returns to normal (and) see some U.S. shale drillers go out of business or if OPEC eventually capitulates without them,” Moya said. “The Russians can now live with $40 a barrel oil and it seems they are willing to stomach even lower prices in the short-term to see the industry consolidate.”
The question is how much lower is lower.
As Flynn of Price Futures Group suggests, $35 is a possibility. That would be about $6 per barrel below where benchmark U.S. closed on Friday.
Monday could be another disaster for crude prices when the International Energy Agency releases its latest monthly global outlook for oil supply-demand. Its chief Fatih Birol has already cautioned the market to prepare for a major downward revision.
“I am going to announce it Monday morning in Paris,” IEA chief Fatih Birol told a Congressional hearing in Washington on Thursday. “The impacts are already severe mainly because the transport sector is heavily affected.”
Last month, the Paris-based IEA, which is an adviser to industrialized nations, warned that the coronavirus could curb annual growth in oil consumption to the lowest since 2011, but still called for 800,000 barrels a day of growth.
Other analysts are now estimating that demand will contract, with Goldman Sachs predicting that consumption could shrink this year for only the fourth time in almost 40 years.
With all the seismic shifts in oil, where could gold be headed?
Common sense dictates that with the global economy in possible seizure and U.S. Treasury yields plumbing new lows daily toward zero, gold has only one way to go - up.
True enough, the yellow metal reached within striking distance of $1,700 on Friday as investors piled into safe-havens. Gold futures also had their biggest weekly gain in 11 years - nearly 7%.
Yet, with gold being one of the most liquid assets to dispose in times of trouble, hedge funds and others with losses elsewhere have also been selling their gold holdings to raise cash. Thus, any rebound in gold thus far has been limited.
Energy Review
Oil plunged 10% on Friday, in one of its worst crashes ever, sending U.S. crude prices to four-year lows, as Russia refused to back Saudi Arabia and other allies in OPEC on deeper production cuts to offset demand lost to the coronavirus.
West Texas Intermediate, the benchmark for U.S. crude prices, settled down $4.62, or 10%, at $41.28 per barrel. WTI earlier fell to $41.05, its lowest since April 2016. For the week, it fell nearly 8%.
Brent, the London-traded global benchmark for crude, lost $4.72, or 9.4%, to close at $45.27. Brent slumped to $45.19 earlier, a bottom since July 2017. For the week, it fell 10%.
OPEC+, which includes Russia and other oil producing countries that aren’t outright members of the cartel, issued a statement after talks in Vienna, saying it would continue consultations to stabilize the oil market.
Prior to its meeting on Friday, there was speculation that OPEC+ could agree to cuts of up to 1.5 million barrels per day. The Saudis were supposed to have come up with 1.0 million bpd of that and the Russians the balance. OPEC+ already has a separate deal to reduce up to 2.2 million bpd until the end of March.
Energy Calendar Ahead
Monday, March 9
IEA Oil Supply-Demand Outlook
Private Genscape data on Cushing oil inventory estimates
Tuesday, March 10
American Petroleum Institute weekly report on oil stockpiles.
Wednesday, March 11
EIA weekly report on oil stockpiles
Thursday, March 12
Friday, March 13
Baker Hughes weekly rig count.
Precious Metals Review
Gold jumped almost 7% on the week, its biggest weekly gain in 11 years, as the yellow metal’s prices neared $1,700 per ounce amid growing fears over the coronavirus contagion that drove investors worldwide toward safe havens.
Gold futures for April delivery on New York’s COMEX settled up $4.40, or 0.3%, at $1,672.40 per ounce. For the week, gold futures jumped 6.7%, their biggest weekly gain since 2009. April gold earlier hit a session high of $1,690.65, coming less than $10 of gold bugs’ target of $1,700.
Spot gold, which tracks live trades in bullion, settled at $1,674.52, up $88.36, or 5.5% on the week.