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Press Release [FREE Access]
Petro Intelligence » Putin Plays An Ace To Ruff Trump’s Hand

By R. Sasankan

The world of petroleum has suddenly been turned upside down. An inferno has now engulfed the global crude oil markets; a battle of wills between Saudi Arabia and Russia is sending prices on a perilous downward course.

In my previous piece in this column “Urals Gambit: Putin’s Strategy To Conquer Indian Market”, I had written: “President Vladimir Putin does not like being out-thought, out-manoeuvred and outfoxed -- especially by the Americans. The US under Donald Trump has been ripping up trade agreements, badgering allies to open up their markets to American products and services, and using the threat of economic sanctions to wear down resistance when charm or chutzpah does not work.”

Vladimir PutinBy sheer co-incidence, even as my article was being uploaded, the crude market collapsed by 10 per cent after President Putin of Russia refused to cut oil production as proposed by OPEC. As the two friends-turned-foes looked down the barrels of their guns, the world saw another severe oil prices crisis looming. The OPEC-Russia understanding, which had ensured stability in oil price in the past three years, has now collapsed, sending oil markets into a tailspin.

Politics has always played a crucial part in the oil market which has always tried to strike a fine balance between demand and supply. President Donald Trump of the US has been looking to adopt a domineering position in the oil market – a posture that no US President in recent history has tried to take – throwing everyone off balance. He first repudiated the Iran nuclear deal that his predecessor had negotiated and slapped economic sanctions against that country. His trade war with China has already hit the world economy and slowed China’s oil imports. President Trump’s latest salvo has been to impose sanctions against Venezuela, which has all but dried up the world’s largest source of cheap, heavy crude.

The low oil price immensely benefits India which imports about 84 per cent of its crude requirement to keep its refineries running. But the latest development cannot be viewed from such a narrow self-interest. Putin has fired his own broadside in retaliation against the bullying style of President Trump. Right or wrong, Putin was believed to be a friend of Trump who helped him in the last US presidential election. It now appears that Putin has been angered enough to act in defiance and put pressure on Trump just before he seeks re-election. The prospect of a bruising battle between master brawler Trump and a Karate black belt Putin is an exciting match that makes a WWF bout pale in comparison.

Donald TrumpThe immediate provocation for the OPEC’s fallout with Russia is the impact of coronavirus. To cope with the situation, OPEC wanted its allies like Russia to agree to an additional production cut of 1.5 million barrels per day till the end of 2020. Moreover, it wanted a rollover of the existing cuts of 2.1 million bpd which, in effect, would have removed about 3.6 million bpd from the market. The Russians flatly refused to play ball and made it clear that President Putin would not entertain any phone call to discuss the subject.

Putin seems to be giving to his growing wrath. The latest provocation from the US stems from the sanctions imposed against firms building Nord Stream-2, an undersea pipeline that allows Russia to increase gas exports to Germany, and the decision to black list the trading arm of Rosneft, Russia’s state oil company, for transporting crude from Venezuela.

Putin probably thinks that the coronavirus scare that is raging across the world is the right time to strike back since it will hurt massive shale oil interests in the US. Shale oil has been seen as a success story in the US, making the country a net exporter of crude oil. But in an election year, shale oil can turn out to be Trump’s Achilles heel. If crude price goes below $ 40 per barrel, quite a few shale oil projects will sink.

“If oil price (WTI) is around $ 40, it could lead to a reduction in shale production by 1 to 2 million bbls/day. If it drops to around $30-35/bbl, almost 50 to 70% of shale oil production could be wiped out. This scenario is not good for Trump as it could lead to massive layoffs in the oil industry in the US,” says trading expert Ravinder Kumar.

Oil expert Dr Bhamy Shenoy believes that in the next few months, OPEC will find it difficult to bring about a supply-demand balance. Oil demand may decline by 4 to 5 mmbd. In his view, oil exporting countries will compete with one another as they turn their spigots to full capacity.

Saudi Arabia cannot be unhappy if the US shale oil is in trouble. But the Saudi leadership enjoys very friendly relations with the US and it would not want to do anything that would hurt US interests. After the 2014 price collapse, US did not cooperate with the OPEC in stabilising oil prices. There is a perception in the oil industry that Saudi Arabia was over-reacting when Putin refused to cut production this time round. Saudi’s decision to boost supplies and reduce price will create a glut like situation. Crude price will sink. The world economy was on the road to recession even before the coronavirus hit.

The world believes that Russia has only a half a million barrels per day of additional production capacity. No one quite knows the truth. There has always been a cloak of secrecy over the Russian situation. Putin must have done his homework well before deciding to reject OPEC’s offer for a production cut.

For President Trump, the immediate priority in an election year will be to bail out the US shale industry by stabilising crude oil prices. The Republican Party has a powerful shale industry lobby which will keep pressuring Trump. Saudi Arabia, the OPEC’s leader, cannot refuse to oblige Trump by salvaging oil prices. This time round, the task is not going to be all that easy considering the deteriorating economic climate. One of the options could be a very drastic cut in crude production. Such a cut will be difficult to enforce. But there is no guarantee that a production cut will restore stability in the oil price.

Saudi Arabia will certainly mount such an initiative. But such a strategy will not meet with success without Putin’s help. Saudi Arabia and Russia need each other and they can patch up at any time. Trump desperately needs both.

By digging his heels in, Putin has tried to constrain the limits of Mr Trump’s power and arrogance. Once, he is convinced that his message has gone home, Putin may agree with Saudi Arabia to bring about stability in the crude oil market. Until then, there will be mayhem in the international crude oil market.



To download the latest issue 'Volume 27 Issue 15 - November 10, 2020', click here
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