Donald Trump is determined to put the brakes on collapsing crude prices in a bid to bolster the US energy sector, some parts of which are facing an existential crisis.
On Thursday morning, with crude already rising following reports that China is set to go on an opportunistic buying spree to bolster state stockpiles, CNBC reported that Trump expects Putin and Mohammed Bin Salman to announce a deal on a production cut.
That deal, Trump apparently disclosed to CNBC before ultimately tweeting about it just minutes after the network published a few sentences, is expected to be a cut of 10 million barrels per day and perhaps as much as 15 million barrels per day.
Read more: China To Do What Trump Couldn’t: Go On An Oil Buying Spree
“Just spoke to my friend MBS (Crown Prince) of Saudi Arabia, who spoke with President Putin of Russia”, Trump tweeted, in what amounted to confirmation of CNBC’s would-be “scoop”.
“I expect and hope that they will be cutting back approximately 10 Million Barrels, and maybe substantially more which, if it happens, will be GREAT for the oil and gas industry!”, the president went on to exclaim.
Crude absolutely surged. WTI jumped as much as 35% to an intraday high of $27.39.
This is the second time in three weeks Trump has managed to jawbone oil prices to a 20%+ gain. On March 19, he set off a similarly epic surge when he suggested he would “get involved” in the spat between Riyadh and Moscow “at the appropriate time”.
Apparently, the “appropriate time” is now, considering high yield energy spreads have ballooned wider and the S&P energy index is coming off an apocalyptic quarterly performance.
(BBG)
“It’s very devastating to Russia, because the whole economy is based on that, and they have the lowest prices in decades”, Trump said last month. “I would say it’s very bad for Saudi Arabia, but they’re in a fight”.
While the Saudis have the spare capacity advantage, they do not have the fiscal upper-hand. Riyadh would end up running something on the order of a 15% deficit in 2020 if Brent stays at $35 and Bin Salman doesn’t cut spending. The kingdom is targeting a 6.4% fiscal deficit this year, a figure that assumes Brent at $65.
“Who has the biggest problem? Saudi Arabia above all”, Mizuho remarked, in a note. “Their burn rate in this market will use up their $500 billion reserve pile within two years”.
Needless to say, Trump is setting the market (not to mention the US energy sector) up for disappointment if this purportedly imminent announcement isn’t actually imminent.
Putin hasn’t actually spoken to MBS, the Kremlin said, following Trump’s tweet, while SPA said the Saudis are calling for an “urgent” OPEC+ meeting to restore the market to balance.
“Over the past few weeks, most of our oil-focused E&P coverage has announced capex cuts to mitigate outspend and preserve liquidity in response to the collapse in prices”, Morgan Stanley wrote, in a recent update. “So far, the average capex reduction has been ~31% below prior guidance”.
Prior to Trump’s tweet, there was little in the way of evidence that the Saudis or the Russias were set to blink in a game of chicken that exacerbated an already tenuous situation last month, as markets were careening into chaos.
Of course, MBS owes Trump a favor (or ten) for letting him slide when the international community turned against the Kingdom following the murder of dissident journalist (and Washington Post columnist) Jamal Khashoggi. Trump also overruled congressional efforts to scale back America’s support for the Crown Prince’s military campaign in Yemen.
It helps that MBS has a notoriously cozy relationship with Jared Kushner.
So, as the president would say, “we’ll see what happens”.
In a Tuesday note, Goldman said Russia would likely be incentivized to participate in talks given the possibility that some of the country’s inland production is at risk of being shut in, perhaps permanently. The Saudis, meanwhile, are amenable to pressure from the White House.
Still, the bank doesn’t think any cut by the US, OPEC+ and Canada would be sufficient to offset the current demand destruction.
Echoing that, Texas Railroad Commissioner Ryan Sitton (who was invited by OPEC Secretary General Mohammad Barkindo to make an appearance at the cartel’s summer meeting in Vienna), said the world needs a 20-25 million barrel per day cut. “We’re seeing a lot of people’s positions soften on this as they realize the magnitude of the problem”, he said.
“funding secured”
And if it goes to 35… US producers still get destroyed.
Be interesting to see who bought oil bigly last 2-3 days…