As the US government tries to convince Russia and Saudi Arabia to put an end to the oil price war, it might just be too little, too late for the Trump Administration.
Saudi Arabia has already hired additional supertankers and a wave of additional supply is about to set sail, according to Bloomberg. In the last week of March, exports rose to 9 million barrels per day (mb/d), up from a rate of 7 mb/d earlier in the month.
Saudi Aramco has also apparently funneled a lot of oil into storage in Egypt, “a stepping stone to the European market,” Javier Blas and Brian Wingfield write for Bloomberg. Aramco is aiming to produce 12.3 million barrels per day (mb/d) in April.
It may not be all smooth sailing. The Wall Street Journal reports that Aramco is struggling to find a home for all the additional supply. Some ships are departing from Saudi shores with oil but have no destination. “There are loadings [from Saudi ports in the Persian Gulf] with no destination on them because we don’t have buyers,” a Saudi official told the WSJ.
The Trump administration is pursuing several avenues to convince Riyadh and Moscow to back down from the price war. On Monday, Trump spoke with Vladimir Putin, where they agreed that “current oil prices aren’t in the interest of our countries,” according to a readout from Moscow.
Trump also spoke with Saudi crown prince Mohammed bin Salman, after which Trump said that the three leaders would “get together.”
“I never thought I would be saying this: Maybe we do have to have an oil increase," Trump said on Fox News. “Because we do. The price is so low now.”
Meanwhile, some US shale drillers and Texas regulators have raised the prospect of participating. Pioneer Natural Resources and Parsley Energy have called for some sort of global negotiated settlement, which would include Texas regulators instituting mandatory production cuts.
For now, there is little sign that the US will be able to convince Saudi Arabia or Russia to change course.
OPEC has been unable to agree to hold an emergency meeting, suggesting that the group has no intention to cut production anytime soon.
Saudi Arabia likely sees little benefit to backing off its new strategy of flooding the market. In fact, Riyadh may now view additional volumes as critical to its budget with prices so low. “Saudi Arabia now needs to produce 13m bl/day and export 10-11m bl/day which, together with government spending cuts of 20-30 percent, will bring down its social break-even towards $50/bl,” Bjarne Schieldrop, chief commodities analyst at SEB, said in a report. “Lifting Saudi Aramco’s production capacity to 13m bl/day is not a threat, it is a need.”
“The market is hoping for too much if it is now expecting Saudi Arabia to cut production aggressively again once we are on the other side of the Q2 2020 oil market disaster and price trough,” Schieldrop said.
On April 5, Aramco will publish its prices for May, which will offer a major signal regarding Riyadh’s intentions.
The thrashing around by the US government, oil regulators and even some shale companies reveals their lack of leverage. They are throwing a lot at the wall and trying to see what sticks. As Liam Denning put it in Bloomberg Opinion: “The long arc of the American dream of energy independence, having recently soared Icarus-like toward energy dominance, has finally crashed ignominiously into energy incoherence.”
At the same time, Russia and Saudi Arabia won’t escape unscathed. Goldman Sachs says that Russia may also face shut-ins. “Russia will likely be required to shut-in production given the inland nature of its production and the decline in refinery runs happening in its European pipeline export market,” the investment bank said. Moscow may want to get ahead of this problem and use it as a carrot to entice cuts from elsewhere.
Riyadh also has immense budgetary pressure from low prices. For now, the Saudi government is targeting volumes over price, but that may not last forever. Perhaps the one piece of leverage the US has is threatening other parts of the American-Saudi relationship. North Dakota Senator Kevin Cramer has proposed pulling US troops out of the Middle East as a way of applying pressure on Riyadh.
Because of these dynamics, some see a slight possibility of an international arrangement. “[W]hile coming to such an agreement remains difficult, signs of policy discussions are multiplying and we believe such an outcome should no longer be dismissed,” Goldman concluded.
But given the size of the demand shock, the attempts to negotiate are “likely too little too late” for the oil market, Goldman concluded.
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