An orderly reduction now or panic shutdowns later?

Bloomberg ran this column by Julian Lee on Sunday:

Here’s what Saudi Arabia needs to do.

At the virtual meeting of oil producers… it should give its counterparts — including those who don’t show up — a clear binary choice and an unequivocal ultimatum. Either they agree to strict, enforced, observable output curbs for everybody and Saudi Arabia will join in… Or Saudi Arabia should make clear it will continue to pump 12.3 million barrels a day, which would result in prices collapsing to single digits to force oil off the market.

If Saudi Arabia believes this threat would be credible – if, for two months or longer, it is capable of producing this much and selling most of this output at any price, however low, and storing whatever can’t be sold for whatever transitory reason,  – and if it also believes it is uniquely suited to this challenge and the risk is worth taking, then I imagine the kingdom is ready to make these demands or has already communicated them to fellow producers.

Russian media have reported that Saudi Arabia has “issued an ultimatum” to Russia: cut 1.5 mmbpd, or else. They quote Bloomberg but I haven’t been able to find the source. Perhaps it’s a creative interpretation of a report that didn’t use the word “ultimatum.”

I suspect that some OPEC+ members still misunderstand how bad things are, not only generally in the market for physical crude but specifically for their oil own oil companies. Estimates of the demand drop and the surplus in April (and May) keep getting worse. Less than a month ago, Trafigura’s chief economist said demand could briefly fall by 10 mmbpd or more. Now the oil trader’s CEO says a 30% to 35% drop in demand is upon us – 30-35 mmbpd eaten away by the virus.

For how long? Will demand recover 100% or remain below last year’s for months to come? Of course supply will fall, but which producers will have to plug in wells and which will keep pumping?

It’s often said that Russia has the advantage, over Saudi Arabia, of a flexible currency and a relatively diversified economy. Sure it does, in the short to medium term. In the very short term, however, which is a prerequisite to all the longer ones, survival may turn on access to storage and the cost of getting your oil to the market, in addition to lifting costs.

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