Who Blinks First!

If you thought that the market is influenced by only supply and demand, I will go a step back and say it is the fear and greed which controls the decisions on supply/demand. The crude oil market is the case in point.

On 2nd April, a couple of tweets by Donald Trump led to bumpy rides in the market. The first one in which Mr. Trump mentioned that he had spoken to Saudi Arabia Crown Prince Mohammed bin Salman and is hopeful that Saudi and Russia will work to cut down crude oil production by 10 mbpd. Later he tweeted that the production cut can go as high as 15 mbpd.

Market read the tweets quite seriously and brent crude price vaulted more than 40% to $36/barrel, and then settled to $30/barrel. WTI crude jumped 30% to $27 and then settled back to @25.

I would rather remain skeptical about the production cut to such an extent. For the US President 10 mbpd or 15 mbpd may not mean much (did he miss a decimal point!), but for the Oil Industry, it means a lot. Even a cut of 10 mbpd would amount to about 10% of global output.

If you remember, the OPEC+ meeting on 6th March in Vienna, where the talks between major producers Russia & Saudi failed because they did not agree on the impact of COVID 19 outbreak and resulting shortfall in demand. The agenda was to scale down the production by just 1.5 mbpd.  Compare this with 15 mbpd production cut hope tweet by President Trump.

OPEC+ meeting failure fallout led to Saudi Arabia responding by offering discounts on its oil and with a plan to produce 12 mbpd from April 2020 onwards. UAE followed suit of increasing their production. Russia said they can increase production by 300-500kbpd. Crude accounts for roughly 80 percent of Saudi Arabia’s revenues and that level of fossil fuel dependence comes with huge drawbacks. Ultimately it boils down to the comparative advantage/disadvantage of the production cost of oil in various geographies and the use of cost-effective production technology.

Russia may have taken the action in order to target the U.S. The biggest loser from the debacle in Vienna was the US Shale oil producers. Just 16 US Shale firms can operate fields at less than $35/barrel. Whiting Petroleum just filed for Chapter 11 bankruptcy. In 2019, 42 oil companies with more than $25 billion in cumulative debt filed for US bankruptcy protection. US crude inventories also reached its peak of 13.8 million barrels.

By now the global demand for crude oil has shrunk by almost 23% compared to the previous year – an indicative measure of Coronavirus impact on Oil & Gas Industry. Economy bleeding profusely at the back-end, it is a game of who blinks first.

Passionate about Strategy and Change Management with proven expertise in consistently enhancing revenue, ROI, & market share year-on-year, by re-organizing business direction and developing & implementing strategic initiatives.

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