Oil Surges After Trump Indicates That Russia And Saudi Arabia Would Cut Oil Production

U.S. President Donald Trump Tweets That He Expects Russia And Saudi Arabia To Cut Oil Production By Approximately 10 Million Barrels

The oil market was shocked by a recent tweet from Donald Trump who indicated that he spoke to Saudi Arabia’s Mohammed bin Salman and that he now expected that Russia and Saudi Arabia would be cutting oil production by approximately 10 million barrels.

WTI Oil prices surged immediately above $27 per barrel but then corrected to lower levels. It remains to be seen how such a deal could be implemented since Russia does not have the technological opportunity to quickly cut oil production due to the nature of its oil deposits and the climate.

In 2019, Russia was producing 11.25 million bbl/day. Saudi Arabia has the capability to produce 12 million bbl/day. Cutting oil production by 10 million bbl/day will mean a roughly 40% production cut. I’ll believe it when I see it.

Russian Energy Minister Alexander Novak Believes That Oil Prices Can Fall Further

In a recent interview to the Russian radio Echo of Moscow, Alexander Novak stated that he expected that oil demand would continue to contract if the lockdown measures were not removed.

This hit to demand could lead to additional softness in the oil price. According to Novak, Energy Ministers of Russia and Saudi Arabia have not discussed the current situation in the oil markets.

Importantly, he noted that negotiations with Saudi Arabia were possible in case countries outside OPEC+ showed their interest in the deal. Obviously, he meant that the U.S. must get into the deal.

What’s Going On?

It makes no sense for Russia and Saudi Arabia to bail out all other oil producing nations including the U.S. Currently, there’s no official confirmation of any deal between Saudi Arabia and Russia.

Also, the U.S. President Donald Trump did not use “barrels per day” or “bbl/day” in his tweet, although the market clearly assumed it – cutting oil production by 10 million barrels (instead of 10 million bbl/day) could not be considered as any material production cut.

Clearly, traders and investors should expect a lot of volatility in the coming hours. To me, a production cut of 10 million bbl/day from Saudi Arabia and Russia does not look like a plausible scenario, and I believe that other oil producers should be included in such a deal. In case it turns out that the production cut is 10 million barrels per month, oil will quickly return to $20.