Oil price sanity may return on Saudi-Russia truce hopes

Singapore

SOME sanity could shine on crude this week on hopes of a reprieve to the Riyadh-Moscow oil row after the commodity's epic roller-coaster ride last week that began with a big leg below US$20 a barrel, followed days later by a momentous 25 per cent upswing.

Much of that will rest on the rhetoric and eventual outcome of an emergency meeting, a rather tricky one, on Thursday among Opec (Organisation of the Petroleum Exporting Countries) and allies to discuss output cuts as oil prices are ravaged by the Covid-19 pandemic.

"I remain confident that the seeds of a new deal have been sown, and that we have seen the lows in oil prices for the time being," said Jeffrey Halley, Oanda's senior market analyst for Asia-Pacific.

As the street plays "headline ping pong" on oil's intra-day price moves, he said that one thing is clear - the major players seem willing to engineer some sort of mutually-agreeable deal on output cuts.

Oil futures have more than halved since the start of the year on the back of demand destruction amid a looming recession - no thanks to the coronavirus outbreak - that was exacerbated further by a price war between oil majors Saudi Arabia and Russia after talks on output cuts collapsed less than a month ago.

The worsening situation has sparked an "existential crisis" for oil with some not ruling out the possibility of the commodity falling to levels below US$10/b and with that, forcing the "mortal enemies" back to the drawing board.

Stephen Innes, AxiCorp's chief global market strategist said: "When (Russian President Vladimir) Putin and MBS (Saudi Arabia's Crown Prince Mohammed bin Salman) started this feud, Russia's objective was to hurt US shale.

"That's all fine and dandy when Covid-19 was thought to be a brief health scare, but now, the virus' economic hit is morphing into the most significant financial hit since the 'Great Depression' and there's going to be a change of heart".

However, given the complexities involved to pull off a truce on output cuts by the oil cartel and allies - and others - some experts remain pessimistic and warn of possible disappointment.

A seed of hope came from an unexpected corner last week - from a tweet by US President Donald Trump that Saudi Arabia and Russia will cut production "substantially" by 10-15 million barrels per day (bpd).

That proved sufficient to jolt crude out of the doldrums with West Texas Intermediate (WTI) surging 25 per cent to US$25.32 per barrel overnight on Thursday to log a record single-day percentage gain.

Global benchmark Brent jumped 21 per cent to US$29.94 per barrel, also its best day in history but still far below the US$66/b note it had begun the year at.

This was quite a recovery from the 18-year low that oil prices hit on Monday as widespread lockdowns to contain the outbreak has whacked energy demand, worsened further by the bickering between the two oil producers since they failed to extend a deal on output curbs that expired in March.

According to TD Securities, while a 15 million bpd cut would unlikely balance the market in the near term, it would go a long way to reframe expectations. Even so, the house said it remains "far from convinced" that such a deal can be brokered, "which opens the door to a disappointment".

Such uncertainties plus profit-taking saw crude pare gains last Friday, only to rise again later on news of a virtual meeting between Opec and allies, originally scheduled on Monday and later delayed to April 9 to allow for more time for negotiations although no one expects a resolution overnight. A truce is not going to be easy, more so as the desired cuts will need the cooperation of other oil-producing countries who are not part of the three-year Opec+ pact. Also, the US which is not part of the energy alliance, hasn't yet made a commitment to join the effort, in part because US anti-trust laws prevent price-fixing.

DBS Group Research pointed out that while oil and gas are nationalised assets for Opec members and many non-Opec allies like Russia, which makes it easier to set production caps at the government-to-government level, this is not the case in the US.

"There are hundreds, if not thousands, of independent oil producers in the US - and oil can be privately owned - and hence how to bring them to the table is the question," the house added.

While the oil price crash appears to have spurred regulators in Texas, the heart of US oil production, to consider regulating output for the first time in nearly 50 years, it is unclear how this could play out.

"Is history going to be made by the US offering up voluntary cutbacks of its own as part of a bigger Opec+ alliance? It's an important question for the market and a potential game-changer not just for the current market situation, but for the future of the US oil industry," remarked Vandana Hari, founder of Vanda Insights in Singapore.

But even if the outcome of Thursday's meeting brings good news for the battered commodity with Opec and allies setting their differences aside successfully, analysts warn that oil won't be out of the woods, although a "gentle lift" will certainly be afoot.

FXTM market analyst Han Tan said: "Crude prices are in need of a saviour, which must come by way of coordinated supply cuts by major producers, at least to put a firmer floor under prices. (But) Even if the supply cuts do materialise, it is unlikely to send 'black gold' soaring, considering the demand destruction already caused by the coronavirus."