The Daily Dose

-Russia is the guerilla leader of OPEC+, balancing Saudi Arabia

-Wood Mac: Coronavirus demand destruction close to rivaling the Great Recession

OPEC chatter was relentlessly opaque before the opening bell in New York City. Reports early Thursday indicated that members of the group agreed to cut output by 1.5 million barrels per day, giving Brent a pre-market bounce. That was erased after it became clear that Russia was not on board. Regardless, Wood Mackenzie said it expected demand destruction to come close to the Great Recession of the middle aughts. Russia’s position that demand pressures are temporary, therefore, could be put to the test in Vienna later this week.

Brent crude oil was trading at $51.20 per barrel at 8 a.m. ET, up just 0.14% from the previous close. Oil prices have been volatile in intra-day trading, but is up more than 1.5% on the week so far on indications that world policymakers are ready to act to address economic deterioration.

With press access in Vienna limited by coronavirus precautions, news coming out of the OPEC meeting on Thursday was confusing at best. Brent saw a sizeable jump at around 6 a.m. ET as news broke that OPEC had agreed to sideline an additional 1.5 million bpd from the market to even a playing field upended by the economic blow from the coronavirus. Two hours later and much of the gains were erased when it became clear that Russia was not yet on board.

Russian news agency Izvestia reported that Saudi Arabia, the de facto leader of OPEC and advocate for an $80/bbl price point, finds deep cuts necessary to address the glut created by the demand destruction. Alexander Frolov, the deputy director general of Russia’s National Energy Institute, was quoted as saying calls for further production restraint were panicked reactions.

“On the one hand, the current problems are temporary and demand will grow, and on the other, the situation in our [Russia’s] oil industry remains stable even at current prices,” he said.

If Saudi Arabia is the unspoken leader of OPEC, Russia is the guerilla leader of the OPEC+ group, playing the role of balancer to Saudi Arabia’s bandwagon. That may lead to the Goldilocks Moment necessary to prevent an over-reaction. Kenneth Waltz, a pioneering scholar of international relations, has said that parties engaged in cooperative behavior need to look for a common denominator. They usually settle on the lowest one, which can lead to the worst of all possible outcomes. That theory may be put to the test late in the week. Ann-Louise Hittle, a vice president for macro oils at Wood Mackenzie, said in an e-mailed report that demand destruction from the coronavirus must play into OPEC’s final decision, and statements from the group indicate it is a top consideration. Hittle said demand is expected to drop some 2.7 million bpd year-on-year for 2020, second only to the 2.8 million bpd during the peak of the global financial crisis. Compounding OPEC’s difficulty is the eventual return of Libya, which is exempt from the OPEC+ curtailments. Already, markets are pointing to an “enormous” glut and if Libyan production returns to 1 million bpd, the situation becomes even worse.

“Our latest market view sees that oversupply continuing, although at a much-diminished rate, through the rest of 2020,” she added.

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