Phil Flynn is writer of The Energy Report, a daily market commentary discussing oil, the Middle East, American government, economics, and their effects on the world's energies markets, as well as other commodity markets. Contact Mr. Flynn at (888) 264-5665
Oil prices now are joining the oil market meltdown as reports are circling that Russia says “nyet” to OPEC’s proposed 1.5-million-barrel production cut.
The deal was that OPEC, led by Saudi Arabia, would cut output by 1.0 million barrels a day, and non-OPEC would cut an additional 500,000 barrels a day led by Russia. Yet despite the expectation that Russia was just trying to play coy with the market for maximum market effect, some sources say their resistance to production cuts is real. So now, if oil prices crash along with other asset classes, it will be on the Russians that may want to use this crisis as an opportunity. Still, despite these reports that Russia is a no, they say, “We favor maintaining OPEC+ cuts at current level. We want to wait until Jun. before deciding deeper cuts.”
While the short-term impact to oil prices might be devastating against a backdrop of coronavirus demand destruction, John Kemp at Reuters says that Russia might be doing Saudi Arabia a favor. Keep says that OPEC+ needs a period of low prices to restrain U.S. shale output and to clear out the U.S. shale supply chain . He said that, “Output cuts now to drive prices to $60+ will make eventual pain worse.” So in other words, Mr. Kemp thinks that OPEC should just crash prices and bankrupt more U.S. Shale companies to put them out of their misery.
Yet despite these reports, Iran is holding out hope that Russia will change its mind. Iran says Russia hasn’t announced its official view about OPEC’s proposal to cut output. If in fact if they do change their minds, the oil snap back would be forever known as the Russian reversal. Russia may have a point though that despite the historic demand destruction in oil, it should be transitory. While demand might get worse before it is better, the truth is that it will get better.
News overnight that may help lighten the darkened mood was a report that China will have coronavirus vaccine available for emergencies and clinical research use in April. Also it is reported that China says, “the day is not far away” before easing restrictions on Hubei, Wuhan.
Still demand destruction is real. China is declining force majeure on LNG shipments into the country/. Airlines canceling flights.
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