-US complains it’s the target of economic war
-IMF sees recovery by 2021 if policymakers can get it right
Just as isolation forced parts of the economic machine to shut down, Russia seems to be left with no choice but to call for production cuts to stem the glut. Storage facilities are already approaching peak capacity and producers may find themselves with no place to put excess barrels. Elsewhere, the exponential recession has become a geopolitical factor, with US lawmakers – in a fit of irony – accusing Moscow and Riyadh of waging war on the American economy. Massive stimulus has put equities in a short bear run, but there may be no quarter for commodities.
Petroleum products may be a worthless commodity in the short term as more and more segments of the economy shutdown. Brent crude oil was down 2% as of 8 a.m. ET to $25.80 per barrel and is on pace for a 5% drop on the week.
In an exclusive phone interview with Reuters, Kirill Dmitriev, the director of Russia’s sovereign wealth fund, says there’s a chance for OPEC+ players – and possibly others – to coordinate on voluntary production restraints.
“We are in contact with Saudi Arabia and a number of other countries,” he said. “Based on these contacts we see that if the number of OPEC+ members will increase and other countries will join there is a possibility of a joint agreement to balance oil markets.”
It’s unclear if Dmitriev is speaking on behalf of the Kremlin as Russian Energy Minister Alexander Novak was behind the unravelling of the OPEC+ agreement that sparked a price war with Saudi Arabia. The US oil and gas sector is collateral damage and the death toll is staggering. Speaking to Bloomberg News, Dallas Fed President Robert Kaplan said the mighty Permian basin may be the next head on the stake.
“You’re going to see lots of restructuring, some failures and lots of challenges in the Permian,” he said. “We think it will shrink.”
Already reeling from the contraction, a group of Republican senators, most of which preside over oil-producing states such as North Dakota, chastised Saudi Arabia because the lack of restraint was causing irreparable harm to the shale sector, once a source of bragging rights for the US economy.
“Our nation’s energy dominance, which President Trump has carefully nurtured over the past three years, is now under direct threat from a country that professes to be our ally,” they wrote.
The irony is that many of these same senators are in support of the “maximum pressure” campaign on Iran that has led to a worrying humanitarian disaster because of the coronavirus outbreak. What’s also striking in the message is a call to unravel the very coordination that propped up oil prices for many years, and by default, the US energy sector.
“Riyadh should leave the antique OPEC cartel immediately and join the United States on the global stage as a free market energy powerhouse,” they added.
This follows a call from Texas oil producers for some sort of artificial restraint akin to the very deal Republican senators are pressing to end. Writing in Bloomberg last week, Ryan Sitton, the Republican head of the Texas Railroad Commission, said it’s time for the federal government to intervene and “make a deal that stabilizes oil markets.”
There may be a light at the end of the tunnel if global policymakers can get it right, but at times it seems like a big if. IMF Managing Director Kristalina Georgieva said during the G20 summit in Riyadh that growth would indeed return.
“We project a contraction of global output in 2020, and recovery in 2021,” she said. “How deep the contraction and how fast the recovery depends on the speed of containment of the pandemic and on how strong and coordinated our monetary and fiscal policy actions are.”
Coordination, like global storage capacity, is regrettably at a premium.