To learn more about the outlook for oil supply and prices, Barron’s spoke recently with Helima Croft, RBC Capital Markets’ global head of commodity strategy, and an expert in geopolitics. Her edited comments follow.
On the lead-up to the price war between Saudi Arabia and Russia:
This was historic because we’ve had situations where we’ve had OPEC raise production to get market share back, but we’ve never really seen a deliberate decision on the part of sovereign producers to raise production in the middle of such a catastrophic collapse in demand.
If we go back to the beginning of the year when we first started getting indications of the Covid-19 crisis, there were real question marks about what the true demand implications would be for oil. Saudi Arabia, I think, saw the writing on the wall very early. The Saudi oil minister saw the situation as analogous to the 2008-2009 financial crisis and really wanted to have a million-barrel-plus cut to address the demand destruction concerns.
Russia, on the other hand, said it’s too soon to tell what it’s going to look like. They basically said, “Why should we have to bear the burden of adjustment? We keep cutting. U.S. producers keep growing. We get sanctioned. If anyone’s gonna cut, it should be the U.S. shale producers.”
On the price war and aftermath:
This all came to a head on March 6 at the OPEC meeting. The Saudis really pushed for a 1.5 million barrel a day production cut on top of the 2.1 million barrel a day production cut that was enacted in December. The Russians essentially said no, all we will do is roll over the existing agreement to June. No further cuts from us. And the Saudis said if you’re not going to cut, we’re not going to have an agreement. And so what we saw was a decision by the Saudis to cut their official selling prices the next day and to ramp up output.
This was not a case like in 2014-2015 where the Saudis were prepared to endure low prices for a prolonged period. What the Saudis were looking to do was essentially drive the Russians back to the negotiating table. And that’s what really happened on April 12. We got an agreement to cut production by 9.7 million barrels a day. It was a historic output agreement, but now the question is, was it too little too late? Was the demand situation so serious? Had we lost so much time in the price war where essentially cargoes were put on the water for refineries that did not need the crude? And that’s what we’re looking at right now. We’re looking at a situation where storage is filling up. We have cargoes that are still on the water and the question is now, you know, can this market be saved in the near term?