Oil prices surged on April 2 after US President Donald J. Trump said he expected Saudi Arabia and Russia to end a price war, which in combination to the coronavirus outbreak and low demand, had driven oil prices to record lows.
On April 2, Brent crude hit $32.78 a barrel at one point and US WTI reached $26.93. Brent futures fell to their lowest level in 18 years on March 30 and WTI ended the previous session below $20.
Trump tweeted about the possibility of a Saudi-Russia truce on April 2. He wrote that he spoke with Saudi Crown Prince Mohammed bin Salman, who spoke with Russian President Vladimir Putin and “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.” Trump and Putin had already agreed on March 31 to talks to stabilise energy markets.
After Trump and bin Salman spoke on April 2, Saudi Arabia reportedly called for an urgent meeting of the Organization of Petroleum Exporting Countries (OPEC) and non-OPEC producers led by Russia, a group known as OPEC+, in an attempt to stabilise the oil market.
“They have to constrict the amount of production and, of course, the easiest and quickest way to try and stop production will be the frackers in America if Trump is willing to take that action,” Justin Urquhart Stewart, director at Seven Investment Management in London, told New Europe by phone on March 31. “The weak level of demand is still going to be there and the issue between Saudi Arabia and Russia isn’t helping at all but if Trump is going to be grown up enough to actually agree with Putin and constrict capacity, it’s not going to push the price up a huge amount but it’s going to hopefully provide some stability,” he said.
OPEC de facto leader Saudi Arabia planned to boost its oil exports to 10.6 million barrels per day from May. According to Urquhart Stewart, the question is would Trump be able to have enough persuasion over the Saudi leader to get him to actually stop the increasing production.
Turning to the economy after the coronavirus crisis, the London-based analyst said recovery is going to be quite muted given the amount of money and debt that has been used for this recovery. “We’re looking at quantitative easing 2 and whether it is Europe, Britain or whether it is America, I’m afraid we’re going to see more money poured into the system to keep it going,” Urquhart Stewart said. “Government expenditure is going to be incredibly constricted because of the amount of money that governments have spent over the past few months in terms of supporting industry and employment – really huge amounts. In Britain, you see the level of debt to GDP ratio, debt to the value of the economy ratio going up to levels we have not seen since the end of the Napoleonic war,” he said.
“It’s manageable but nonetheless it’s going to constraint the government’s ability to be able to put money into infrastructure and things like that in the future and taxes will be going up. So, yes, there will be a recovery but the recovery is going to be led probably with the likes of China being able to put more money into the system, but I think Europe is going to find it more difficult overall. So, yes, prices will recover at the end of it but you’re not going to see the buoyancy you saw a year ago,” Urquhart Stewart said.
He noted that while lower prices may be welcomed by key workers who drive to work, most people are in lockdown and most airlines are grounded. “Very little of that is going to get passed through the system to any great extent, if there will be some benefit,” he said. He also noted that people are switching to electric or hybrid cars. “So, the use of petroleum is going to be decreasing over the next few years and, of course, this merely supports the idea that Saudi Arabia has to sell its oil because in 100 years nobody is going to want it,” he said. “And all the airlines are grounded and when they come back, they will not be coming back with the same level of capacity,” Urquhart Stewart said, adding that airlines will take this as an opportunity to cut their debt, reduce the routes and brands they don’t want, cut their starting capacity and come back as a smaller but much more profitable airline.
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