Is OPEC Expansion the Answer

03/27/2020 12:24 pm EST

Focus: COMMODITIES

Phil Flynn

Senior Energy Analyst, The PRICE Futures Group

Speculation that an expanded OPEC + cartel can resolve the crude oil price war, reports Phil Flynn.

Russia has a plan to stabilize global oil prices. Create a new, bigger, and better OPEC. This comes as pressure mounts in Russia and Saudi Arabia to call off the price war that put more pain in a global economy already suffering from the historic economic hit that has been experienced by the Coronavirus.  A letter from some U.S. Senators accused “The Kingdom of Saudi Arabia and the Russian Federation of economic warfare against the United States. “

So much for that central bank of oil thing.

This virus hit energy first, and the International Energy Agency (IEA) warns that global oil demand could fall by a whopping 20 million barrels per day. The massive drop in demand has even complicated the Saudi’s plan to flood the market as buyers of Saudi crude are reportedly looking to cancel oil delay shipments.

Reuters reports that “Royal Dutch Shell (RDS.A) and U.S. refiners were taking less Saudi crude, Finland’s Neste was not taking any in April and Indian refiners had sought delayed deliveries, the sources said. Polish refiners were also easing up on purchases Unipec, the trading arm of Asia’s largest refiner Sinopec, has also decided against lifting more Saudi crude in April after freight rates surged.”
This is raising fear that the world will run out of storage. There are also reports that oil tankers around the globe are filling up with oil at a record pace. Yet could the talk of a new world oil order save the oil market.

Reuters news reports that “A new OPEC+ deal to balance oil markets might be possible if other countries join in.  Kirill Dmitriev, head of Russia’s sovereign wealth fund, said, adding that countries should also cooperate to cushion the economic fallout from Coronavirus.

 Reuters also reports that “Joint actions by countries are needed to restore the(global) economy... They (joint actions) are also possible in OPEC+ deal’s framework,” Dmitriev, head of the Russian Direct Investment Fund (RDIF).

Dmitriev and the Energy Minister Alexander Novak were Russia’s top negotiators in the production cut deal with OPEC. The current agreement expires on March 31. “We are in contact with Saudi Arabia and several other countries. Based on these contacts, we see that if the number of OPEC+ members will increase and other countries will join, there is a possibility of a joint agreement to balance oil markets.”

The U.S. may join this deal, and it also represents a change in Russia’s hardline oil hawk stance. Russia has already changed plans to spend money to increase production capacity.

It is possible that Russia is giving in to pressure from low oil prices but also growing political blow-back from nations around the globe. The Russian/Saudi price war shows their disdain for their global neighbors.

At least some Senators are standing up to them.  Senators Lisa Murkowski, Kevin Cramer, Dan Sullivan, James M. Inhofe, John Hoeven, and Cindy Hyde-Smith stated in a letter to Secretary of State Mike Pompeo, accused the Saudis and Russians of product dumping and economic terrorism.

Some highlights: “During this time of pandemic and the global financial crisis, the Kingdom of Saudi Arabia has chosen to settle scores in the oil market. Riyadh’s motivation may be multi-faceted –to punish the Russians, To capture near-term market share, to destabilize long-term investment in American energy, but the end result is the same. Our nation’s energy dominance, which President Trump has carefully nurtured over the past three years, is now under direct threat from a country that professes to be our ally.”

The Kingdom of Saudi Arabia must change course. The American people grow weary of providing for the defense of Saudi Arabia –with military financing and weapons sales, logistics and intelligence-sharing, and the deployment of our men and women in uniform. This relationship will be difficult to preserve if turmoil and hardship continue to be intentionally inflicted on the small-and-medium-sized American companies that are the heart of our nation’s energy abundance. ...”

This letter came the same day that the U.S. Department of Energy suspended its plans to buy crude for the Strategic Petroleum Reserve. The reason was that the requested $3 billion in funding for the project was left out of the $2 trillion stimulus package. “Given the current uncertainty related to adequate Congressional Appropriations for crude oil purchases associated with the March 19, 2020 solicitation, the Department is withdrawing the solicitation,” an amendment filed Wednesday said.

Oil is ready for a potential up week despite the bearish fundamentals. Even gasoline is bouncing back despite the record demand destruction. What traders should learn from that is that after a market has already crashed, look at the charts and not the scary headlines to make your trading decisions. Don’t underestimate the impact of the 2.2 trillion dollar stimulus bill and the Feds unprecedented QE forever and negative short term interest rates. The Fed and printed money can make the fundamentals meaningless. 

Still today the main driver will be the congressional vote on the 2.2 trillion dollar stimulus.  Some reports that the vote may be delayed. Oh boy here we go again!

Trade strategy may be key to ride out the crazy moves that will come with the headlines so keep in touch with our daily analysis. Makes sure you are getting my Daily Trade Levels! Read Phil’s energy report at Price Futures Group. Twitter: @energyphilflynn | Facebook: Phil Flynn

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