| April 12, 18:00 GMT | By Ismail E Esat
The Oil War. Saudi Arabia & Russia; the heavy weight giants of the global economy have been participating in intense discussions for the future of oil. For the past three months the ongoing discussions and so-called power movements has been overlooked by the eye of many in light of the more serious issues the world is facing: COVID-19.
During March 2020, failed OPEC+ talks led to Saudi Arabia initiating a price war with Russia and increase in oil supply, leading to a massive decline in oil prices. This saw a decline in oil prices by 50% with prices hitting a staggering $20 per barrel and still currently trading around this price today. This led to massive geopolitical consequences with markets already declining due to the global pandemic. When looking further into the matter, this proved to be of benefit to Saudi Arabia whose previously agreed OPEC+ production cuts expired towards the end of March. During March, Saudi Arabia increased their production output to a record 13million barrels per day in an attempt to defend its market dominance and intensify price wars with Russia.
Oil prices were trading at an average $47 per barrel before slumping to a low of approximately $20 per barrel after March 6th.
On 8th April, After intensifying price wars which led to huge supply surplus, Saudi Arabia and Russia agreed a deal to cut oil production after a virtual OPEC meeting. This saw a surge in oil prices by 11% to roughly $27 per barrel. However, although a deal in principle has been agreed, the finer details of this agreement are yet to be discussed.
Russia have declared that they are willing to reduce their output by 1.6 million barrels per day, approximately 15%, with Saudi Arabia also discussing a similar rate. However, they are still persistent on their stance with regards to the U.S. and will only agree if they also cut outputs too. President Trump has stated that America’s cuts will ‘happen automatically’ which has placed huge diplomatic pressure on both Saudi Arabia and Russia. There has been an immense pressure on Saudi Arabia to increase their oil prices, with the U.S. government officials and lawmakers abandoning their traditional stance that cheaper oil prices would be of benefit to the American economy. Thus, lawmakers have demanded quick action from Saudi Arabia. Saudi Arabia can boast some of the lowest oil production costs in the world, meaning that Aramco could withstand low prices for a prolonged period of time which would place pressure on Russia and the U.S.
Although the Global oil deal has been ‘agreed’ in principle, there is still huge risk with recent news suggesting that Mexico have refused Saudi Arabia’s and Russia’s plan for production cuts.
Mexican President Andres Manuel Lopez Obrador stated in a press conference on Friday morning that a deal has been reached with OPEC+. However, there is suggestions now that his stance has shifted. Saudi Arabia’s initial agreement terms depended on Mexico’s participation with Riyadh’s Energy Minister, Prince Abdul-Aziz bin Salman, determined the burden of cuts must be shared as widely as possible.
The key turning point is seen to be the meeting today of G-20 oil ministers, chaired by Saudi Arabia, where countries outside OPEC+, including the U.S., are expected to make commitments to support oil markets.
For the coming future, oil prices will be clearly determined by the nature of the agreement and whether talks over the weekend will be successful. A failure to agree a deal could reignite the war between Saudi Arabia and Russia and would see market prices plunge on Monday.
From an investor’s perspective, Oil is currently at a 4-year low and would be considered an attractive rate at approximately $20 per barrel. The likelihood is that we will see oil trading around this price for the coming weeks. However, if talks over the weekend are positive, then this could see the start of price rises to a long term predicted value of $60-70 per barrel.
With prices at a 4-year low, we could see oil rise to an avg. of $60-70 per barrels, depending on agreements between OPEC.
OPEC+’s tentative plan would see the output curbs tapering off after two months, depending on the evolution of the coronavirus. The 10 million-barrel-a-day cut may shrink to 8 million a day from July and then 6 million a day from January 2021 to April 2022, according to the OPEC statement. The group is planning another video conference on June 10th to discuss what additional measures need to be taken.
Saudi Arabia and Russia will apply reductions to a production baseline of about 11 million barrels a day, according to the OPEC statement. For Saudi Arabia, that’s lower than recent output, which rose above 12 million barrels per day in early April. Other countries would cut from their October 2018 levels.
OPEC stated in an internal document circulated to ministers that “For oil markets, the massive oil-demand contraction is unprecedented. The current outlook looks extremely bleak, with oil markets anticipated to be severely tested on many fronts.”
One economy that depends on a healthy oil price is Canada. The CADCHF chart has recently seen a strong correlation between CAD and oil, with CADCHF breaking a 4-year low and currently trading around the 0.69 level. Throughout March, we have seen the pair ranging between 0.66 and 0.69 with the pair now having broken that range.
CADCHF has broken out of its month-long range. We are looking to target levels of 0.72 and 0.78 respectively over the coming months.
Recent movements would be seen as huge order collection in the market. With the pair strongly correlating with USOIL and with agreements expected, we are expecting this pair to rise to an initial target of 0.72 and with a longer-term outlook of 0.78 in Q4.