Is a Russia-Saudi-Arabia-Texas crude oil axis possible?
Based on the media hype, it seems not just possible – it seems probable.
Demand destruction in the oil market was already in place. The coronavirus pandemonium only accelerated it.
And the oil price war between Russia and Saudi Arabia only helps to worsen things.
The oil industry needs shock therapy. And so it is.
U.S. President Donald Trump has jumped into the fray, saying he would intervene at an opportune time. Reports indicate Trump vowed to intervene after U.S. oil companies lobbied the president to save the oil industry.
Given that the oil industry supports Trump’s re-election bid, he likely felt he had little option but to comply.
The Wall Street Journal reported that the U.S. could ask Saudi Arabia to revisit plans to hike output. And, in order to bring Russia on board, the report quoted a Trump administration official saying the U.S. was weighing sanctions against Russia.
Will Trump succeed?
That depends on the other two countries involved in the price war. Russia wants to damage the U.S. shale oil industry. And although publicly the Saudis suggest they just seek higher prices to balance their budget, this price war may also be about oil market dominance and a desire to engineer structural changes in the marketplace.
To make a deal with the U.S., both the countries would need to find a way to save face. And U.S. oil output would need to be part of a broader output management scheme.
Russia has made it clear it’s not ready to allow U.S. producers to gain market share at their expense. Moscow may also want other concessions, such as an end to the U.S. sanctions affecting the Nord Stream 2 pipeline project and the Russian energy company Rosneft.
From a Saudi perspective, the burden of cutting output needs to be shared between the stakeholders. And if somehow the U.S. agrees, that would be an added blessing.
For political reasons, the Saudis can’t push the U.S. to join the club. However, recent reports insist there was a convergence of interests between the Saudis and Russians on the issue. The Financial Times, quoting a Saudi source close to the royal court, said it was in Saudi Arabia’s interests to “allow this thing to go on for a while to bring structural change to the industry.”
“Get rid of weak shale players and send a message to Tesla’s of the world and alternative energy, there’s a lot that could change the whole picture of oil,” the Financial Times quoted the source as saying.
Can Russia be bullied by applying more sanctions, as Trump is apparently contemplating?
Russian President Vladimir “Putin is known for not submitting to pressure,” Alexander Dynkin, president of the Institute of World Economy and International Relations in Moscow, told Bloomberg.
For Putin to retreat, the U.S. must make concessions.
That doesn’t seem as far-fetched as it once did.
In a Bloomberg opinion piece, Ryan Sitton suggested that Texas, Saudi Arabia and Russia all cut output by 10 per cent. Texas produced 5.35 million barrels a day in December.
Scott Sheffield, chief executive of shale oil player Pioneer Natural Resources, has reportedly spoken to the Texas governor about offering such production restrictions in negotiations with the Saudis and the Russians.
In order to manage the crisis, a growing number of analysts now feel an OPEC-Russia-Texas crude axis is needed. And preferably it includes Alberta.
In a fragmented world where multiple powers wrestle for control of the oil market, such an axis may be the best bet in the long run.
Toronto-based Rashid Husain Syed is a respected energy and political analyst. The Middle East is his area of focus. As well as writing for major local and global newspapers, Rashid is also a regular speaker at major international conferences. He has been asked to provide his perspective on global energy issues by both the Department of Energy in Washington and the International Energy Agency in Paris.