There Have Been Rapid Developments in the Oil War
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There Have Been Rapid Developments in the Oil War

by | published March 20th, 2020

It is Friday morning and I am taking a break from a marathon series of international conference calls that began at little before 5 AM.

Included in the mix are my “usual suspects” network of large private investors, European bankers and finance folks, along with Persian Gulf, Russian, and other oil people, and a few having direct access to principal policy makers.

I have about an hour here before getting back on the phone, so, this Oil and Energy Investor will be quicker than usual.

The Past Two Days Behind the Scenes

For me, the subject matter of these current conversations began two days ago. Subsequently, an initial trial balloon during a thirty-minute interview I did with Russian national television yesterday. Amid the COVID-19 (coronavirus) frenzy of hunkering down and limiting travel, they managed to send a Miami-based camera crew to my residence in Fort Lauderdale.

Here overlooking a now deserted beach we discussed the current Moscow-Riyadh impasse and the collapse in oil prices. That downward slope is continuing today after a spike up yesterday.

However, following some consensus among the global group I advise, a possible way to extricate the oil market from its current mess was offered during my appearance. NTV plans to air the complete interview (dubbed) from Moscow on Saturday.

We shall see.

Crude Production Is Slated to Ramp Up in Days

I have discussed the details of how the OPEC+ (OPEC plus main non-member producers led by Russia) production cuts collapsed and both Saudi Arabia and Russia (along with others) started ramping up production. All previously agreed to cuts, totaling 2.1 million barrels a day officially and close to 2.6 million in practice, cease on March 31. The 1.5 million barrels in additional reductions put forward in a take it or leave it ultimatum (roundly rejected by Russia) are also history.

All of this comes back online April 1 with the Saudis moving their production to 13 million barrels a day and the Russians also increasing to maximum levels. There are no specific figures coming from Minenergo, the Russian Energy Ministry, but anecdotal intel from my in-country contacts concludes the Russian oil sector cannot sustain much above 12.2 million barrels for any multi-month period moving forward.

Nonetheless, the figures amount to at least six million barrels a day of new volume rushing in.

All of this means a market facing significant demand reductions because of the economic impact of COVID-19 ill also confront a tidal wave of new supply. This is a recipe for further price losses to $14-$18 per barrel prices in a few weeks.

For their part, Moscow and Riyadh are viewing this as an opportunity to wrestle market share – essentially from each other while marginalizing the impact of U.S. shale oil exports on the global price.

Cutting Through the “Fake News”

By the way, contrary to what certain U.S. cable TV commentators have been telling you, my sources – close to the power in both countries – tell me there is no truth in the idea that the “oil war” began because either the Saudis or Russians saw it as an opportunity to attack US production.

Against this fluidly changing backdrop, consensus in my network is on the following three point “peace” proposal. I am releasing the specifics here first.

  1. Production is scaled back to levels existing as of March 1. That would include a rolling forward of the 2.1 million barrel a day cut back currently on the books with that move lasting for the remainder of the year.
  2. A series of contract swaps and end-user transfers allowing higher Saudi sales to Europe and greater Russian ESPO (East Siberia Pacific Ocean) grade crude moving into Asia. Designated third-party entities, primarily based in Switzerland (for Europe) and Singapore (for Asia) would be included to stabilize the swaps. The system would require that intermediaries shoulder some of the expense.
  3. A new series of derivative paper will be circulated essentially to expand the risk pool beyond the producers and end consumers (primarily refineries). This may result in financial institutions carrying oil in a certificate relationship during the course of active export contracts.

Should we agree on a final wording (always a big caveat in these sessions), the proposal will be moved up channels.

Stay tuned. Misquoting (as everybody does) Betty Davis from All About Eve, “Fasten your seatbelts, it’s gonna be a bumpy ride.”

We’ll get through it.

Sincerely,

Kent

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