Russia Happy with Oil Prices as They Are (For Now)

BRANDON J. WEICHERT | THE WEICHERT REPORT

Even before the coronavirus outbreak became a pandemic (that world health institutions refuse to identify as such because the Chinese government is putting pressure on them not to do so), the price of oil was becoming a point of contention.

You see, earlier in the year, the Reuters poll of energy analysts predicted that the coming March meetup of the OPEC+ members would vote to raise oil prices. At the start of the year, everyone assumed that the price could not remain at the relative historic lows.

Andrew Butler of Seeking Alpha gave a brilliant assessment at the end of January in which he shared his prediction that oil prices could surge as high as $130 per barrel by June of 2021, based on the notion that the price of oil would spike to around $90-$100 by the middle of this summer.

Here is Andrew Butler’s basic breakdown from last month:

Courtesy of Seeking Alpha.

Then came the coronavirus in China.

And with that outbreak, demand from China–an oil-devouring nation of more than one billion people, all of whom require increasing amounts of energy to maintain their country’s meteoric rise–plummeted.

Whereas at the start of 2020, oil producers were expecting oil demand to increase by 800,000 barrels per day, after the disease outbreak globally, demand was cut by 30 percent. Analysts are now predicting a cut in demand for the year by about 400,000 barrels. Ruh-roh.

Until this week, massive tanker ships were being turned back by the Chinese regime. Saudi Arabia, the leading supplier of oil to the People’s Republic of China, which needs the global price of oil to remain high so that Riyadh can implement its visionary 2030 diversification plan to wean the kingdom off of its dependence on the petro-economy, went skittish. The Saudi leadership envisions that, by 2030, the Kingdom will not be an exclusively oil-driven economy.

Courtesy of Bloomberg.

Instead, they will be a high-tech diversified economy. In order to achieve this ambitious goal, Riyadh’s leaders must have a massive amount of cash to invest in the infrastructure needed to get their 2030 plan going. That is why Saudi Arabia is going public with their national oil company, ARAMCO. It is valued at nearly $2 trillion. The money that Riyadh gets from taking ARAMCO public will be reinvested into the 2030 plan.

Courtesy of Bloomberg.

All of that hinges on the price of oil remaining relatively high–which is why the Saudis are going skittish, as the coronavirus overtakes the world and suppresses demand, potentially over the long-term.

It appeared as though the Saudis would demand major cuts in oil production in order to keep the global price of oil from collapsing. That is, until the Russians intervened. You see, Moscow has been in a wait-and-see mode since the start of this year. With oil now having endured its worst price decrease since the 2008 Great Recession began, many oil-producing states want the price to increase. Moscow, however, thus far opposes this move.

Instead, Russia’s newly-minted president-for-life (well, at least beyond 2024), Vladimir Putin, assured audiences that Russia’s economy could handle the oil prices where they were at and insisted that there was no need for the sharp cuts that Riyadh is advocating for.

Courtesy of Bloomberg.

Putin correctly asserted that the steep cuts that Saudi Arabia is talking about committing OPEC to would not revive demand for oil–especially since the demand is being reduced due to the presence of a pernicious, thus far incurable, pandemic. Until that situation is ameliorated by medical professional around the world, it is unlikely that demand will be revived (even though China is, at least partly, coming back online).

Still, since Russia is basically a giant gas station, its entire economy requires a higher international oil price to function properly. Already, the Rouble to its weakest point since early 2019. Meanwhile, tensions with Turkey over Russia’s ongoing presence in Eastern Syria has erupted and the stock market has dropped–meaning that external pressures are likely going to change the Russian perspective over time (especially as the coronavirus continues unabated for the next six months, at least).

Russia is set to meet with the other OPEC members next week, beginning on March 5, when the group will decide how best to respond to the plummeting oil prices in the wake of decreased demand due to coronavirus. Between the coronavirus stock market correction and the potential of higher-than-usual oil prices–as well as Mideast conflict–the chance for recession is high. The Trump Administration must be prepared for fundamental changes to the economic situation and make adjustments at both the policy and political levels–particularly as it heads into what will be a contentious presidential election.

©2020, The Weichert Report. All Rights Reserved.

1 Comment

  1. Good post Brandon. I’m predicting oil drops to somewhere between 25 and 30 per barrel. May sound crazy, but based on global issues these are crazy times. Of course caveats abound. I can’t wait to see what the stock markets do tonight/tomorrow.

    Liked by 1 person

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