HomeWill Russia and Saudi agree on Oil Cut?

Will Russia and Saudi agree on Oil Cut?

8 April 2020 By Eliman Dambell

Oil prices continued to slide on Tuesday as markets still await the production cuts promised by President Trump to take place. The tweet which came from President Trump on Friday alluded to conversations had between fellow producers Russia and Saudi Arabia. This laid out the possibility of cutting production by up to 10 million barrels per day. 

Following the tweet, a meeting which would have involved the two powerhouse producers had been scheduled for Monday. This failed to materialize and has now been scheduled for tomorrow. So on the eve of this meeting, what would a deal mean for Oil prices? Or could further postponements create further tensions in markets, sending prices back to recent lows in the process?

The Oil Problem

With crude oil prices on the decline as the demand for the energy has faded during the last few weeks. Markets now look towards tomorrow’s meeting for a solution. The problem here started which Saudi cut prices, but also increased volumes of supply in crude. This started a price war, with the Russians doing the same. This came at the time where most commercial flights across the globe were halted in a bid to fight off the spread of COVID-19

Prices in Oil as a result fell to as low as $19 per barrel, which was a 20 year low. This low affects all major producers, including the US, who’s shale gas production has been cited as one of the issues in the decline of prices 6 years ago.

As seen on the chart above the recent sell off has been the biggest in recent years. From February to date, prices have fallen by a total of 60%, which was more than the initial sell off in 2014. Many now believe that if a solution cannot be put in place by tomorrow’s call, we could see a new spell of sell offs.

 

So what are the solutions?

Some say the solution to a low price, is often an even lower price. This seemed to be the approach taken by Saudi initially in cutting prices. The reason many believe that to be the case is by, cutting prices even more, and reacting to the bearish market, many of those who would be in the demand category would see this as a great time to buy, and in turn moving a bearish market bullish. 

However this hasn’t worked, Oil prices continued to fall, and due to the fact that even low prices wouldn’t create demand, as it would only act as additional costs, when most businesses are trying to cut costs to remain operational during these times of crisis.

So now keeping prices where they are but cutting production, will mean that when demand gradually begins to increase as the world starts to operate with some level of normality.  Then the shortage in supply will create an environment where buyers are in competition for crude. For this to happen firstly an agreement must be made. Not only by Russia and Saudi, but also the US, who may need to find a way of getting a deal made, by maybe lifting restrictions on Russian business.

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