During one of our analysis, we found a weak relation to negative price movements after OPEC meetings. Initially, we thought it was too political and risky to claim that OPEC meetings are generally succeeded by price decreases. From a rational point of view, a commodity market cartel’s meetings should be to stabilize or increase prices. However, this one was quite a lesson for all oil watchers…
Why? Because after the meeting, there may be no agreement, and the cartel may go with its ongoing cuts. However, the dispute between Russia and Saudi Arabi turned into a price war. Saudi’s has carried out price attacks before. So it is not unprecedented. But the effect is enormous. Oil prices have seen the biggest drop since 1991.
It was not so obvious that such a move may happen. Our common sense tells us that the price of war is bad for everyone. Recent reports are giving clues that such an act was in the development at least since February. WSJ claims King Selman called Putin, but Putin made him unavailable for talk. Later he talked to King and rejected oil production cuts.
Ali Al-Naimi, the famous Saudi Oil Minister, has initiated a price war to hit shale oil’s increasing market share. This cost him his job in 2016. In the last days of the OPEC+ era, we were hit by a demand shock (although some experts name it as a supply shock) caused by Coronavirus. After this demand shock, a supply glut is like a perfect storm.
On Friday, we talked with Cüneyt Kazokoğlu in our podcast about Coronavirus’s impact on oil markets. I made a forecast claiming that Saudi’s will defend the price since that was the market sentiment. Neither options market nor future market was giving a sign of price war. But we mentioned about Bob McNally’s 26$/b forecast too. Now, the price war is a reality, and the riskiest move has been made.
Why? There may be several reasons, but we do not have information on the details. But if such a move is a very big event, it should be a cross-cutting move aiming to achieve several objectives. One of them is about Russia-Saudi-US trilateral relations, and the other one may be about Saudi succession. Continuous weak oil demand may be another motivator. Shale bankruptcies and the consolidation of shale assets in the hands of big oil companies maybe another dimension. But these are all conspiracies.
The reporters claimed Saudis are looking for 80$, Russia was giving the message that he is adjusted the budget for 40$/b. Shale oil is looking for 50$/b. How about the others? Most of the OPEC members will be hard hit by any price below 60$/b. From the developing countries’ perspective, this is good news from a distance. But coronavirus panic on steroids with an oil price war may not look suitable for anyone.
So what may happen? In terms of pure speculation, the first question is the possible duration of such a price war. Since it is very sharp, the duration can not be too long. This is the reference scenario. The alternative one is that it will last 18 months or so until demand picks up strongly. Sometimes I resemble energy demand to giant metal gear. It takes quite a lot of effort to make it move, and it takes more effort to slow it down.
One possible narrative may be the repeat of previous events. A third party OPEC member may broker a new deal between Saudis and Russia. Previously Noureddine Boutarfa brokered such a deal bringing Russia and OPEC inline because third countries suffer from these wars more than the warring countries.
What is the message in this price war? The obvious one is market share. But there must be some other messages to justify such a sharp message. It will be revealed slowly, I guess. This is good news for consumers, bad news for shale, OPEC, and other oil producers. Another good news for natural gas demand and commodity consumers. Now we have to look at food prices. The revenues of oil producers will drop, but the subsidies for their domestic food supplies will continue until they feel the pain.
There may be other questions and answers, but the biggest question is still Saudi Arabia.