The GERM Report

-Russia has all the aces.

-Sitton tries again.

Russia may once again showcase its influence over the global energy sector by convincing free-market players to at least pay lip service to artificial control mechanisms. Dozens of major oil producers will take part in meetings coordinated by parties to the OPEC+ regime to discuss demand disintegration and market stability. At issue is the degree to which private-sector players are willing to stem operations. Already, some US voices are calling for government control. From a Kremlin perspective, governments with a heavier hand, such as China and South Korea, have managed the coronavirus pandemic better than their more democratic counterparts. The same could be said for the oil market.

The price for Brent crude oil was up a meager 0.5% as of 8 a.m. ET to trade at $32.03 per barrel. An early-morning rally on Tuesday was cut short after optimism faded that some sort of a grand deal was possible among the world’s major oil producers. That could be a sign of things to come.

Dmitri Trenin, director of the Carnegie Moscow Center, posits that nations with a heavier degree of government control are handling the COVID-19 and market crisis better than most. Russia is finally feeling the pain from the collapse in oil prices, he noted, by building up “substantial reserves to cushion the blow.” Major national projects could be put on the shelve, but generally speaking, the deep economic wounds caused by the coronavirus shutdowns elsewhere validates the Kremlin’s perception that the liberal order is a thing of the past.

“Russia may interpret recent events as confirming the wisdom of self-reliance in a globalized world driven by individual countries’ self-interests,” he wrote. “Russia is now better prepared to deal with an economic crisis than it was in 2008 or 2014: it has larger currency reserves, lower external debt, and a lesser reliance on imports of food and other goods.”

That may resonate with US President Trump, who pegs his success on a sort of nationalism that aims to “Make America Great Again.” And he has his apostles. Ryan Sitton, an outgoing commissioner for a Texas energy regulator, has made repeated calls for government action. In his latest plea, Sitton says a do-nothing approach could push crude oil to $140 per barrel and US retail gasoline prices beyond $4 per gallon, all while major corporations linger behind the 8-ball of capex cuts and bankruptcies. Slapping tariffs on oil imports could work, he writes, but “refiners need more oil than we produce.” Working toward some international agreement on production is the better option. Sitton added that Russian Energy Minister Alexendar Novak agrees.

Not all US players are on board, however. The US Energy Department pointed the finger at the OPEC+ group, notably Russia and Saudi Arabia, for the destruction in the US energy sector, not exactly a message of coordination. Most of the supermajors involved in the US shale patch have slashed their budgets, and a lot of that targets the mighty Permian basin. The current situation, the department’s spokeswoman said, is temporary though and the market will recover. “The market” has already forced Bakken producer Continental Resources to cut its production so Washington’s official line may be that it is playing ball with foreign producers, but on free-market terms.

The Kremlin, which may be adopting a we’ll-go-if-you-go-first posture, is not having it.

“You are comparing the overall demand drop with cuts aimed at stabilizing the global market,” Kremlin spokesman Dmitry Peskov told reporters. “These are completely different things.”

Trump and his loyalists may find themselves between a rock and a hard place. Accusations of mismanaging the pandemic and a faltering economy do little to support his re-election bids. This US president is the grand master of messaging, so he needs to do something to claim victory in the oil sector. A big-stick approach would likely backfire if Russia and Saudi Arabia continue to flood the market. And Trump is certainly not one to take a do-nothing approach. That leaves him with no option but to embrace nationalization or be satisfied with a multilateral agreement that may be tantamount to fake news.