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Oil Bounces On Hopes For U.S. – Russia Talks But Downside Risks Stay Intact

Hopes of U.S. – Russia talks boost oil prices, but problems on the demand front keep upside in check.
Vladimir Zernov
Crude Oil

Donald Trump And Vladimir Putin Will Let Their Officials Talk About The Oil Market

WTI oil briefly visited sub-$20 territory on Monday but then started to rebound following reports that the U.S. President Donald Trump and Russian President Vladimir Putin had agreed to order their top energy officials to discuss the current oil price war between Russia and Saudi Arabia and the general state of the oil market.

Russia is in a challenging position despite the reserves it has accumulated during better times. The recent drop of the Russian ruble provided some support for Russian oil companies and the Russian budget, but it in no way shields the country from the negative impact of the current oil price environment.

In addition, Russia is starting to experience its own problems with the coronavirus, which will put additional pressure on the country’s economy. The latest daily update indicated 500 new coronavirus cases in Russia, a new record. Moscow, which is the absolute center of Russia’s economic life, is already in a lockdown.

In this situation, Russia wants higher oil prices, but the country has little impact on the market right now – just like everyone else.

The problem is that lockdown measures all over the world have eliminated a huge portion of the world oil demand. According to Goldman Sachs, the hit to oil demand in the last week was about 26 million barrels per day.

It is not surprising that oil is trading at levels not seen since 2002 – oil producers continue to pump oil without production cuts, while the demand has been cut by roughly 25%.

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Any Deal Is Very Hard To Achieve

Obviously, all market participants want to see oil at higher levels. However, it remains to be seen whether any coordinated action is viable. Even when oil demand starts to rebound, major cuts will be required from all oil producers.

Thus, nobody would tolerate a situation when someone does not cut production but gets the benefits of the coordinated production cut. Major oil producers will have to make sure that everyone does their fair share of production cuts.

This will be especially challenging to achieve in the U.S. which has plenty of private, independent companies.

In this light, it’s hard to expect anything more serious than verbal interventions in the near term. To start the talks, oil producers will need reasonable demand estimates for the rest of 2020.

At this point, the situation is so fluid that demand estimates change on a daily basis. In such environment, it is impossible to come up with a plan and enforce it. If the situation on the coronavirus front continues to get worse, oil will again visit the sub-$20 territory.

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