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Home » News » Commodities » Why it may not be time yet to go long the oil price

As the price for a barrel of crude oil is plunging, OPEC oil producers and Russia were meant to come to the negotiating table this Monday to discuss curtailing output, a move that President Trump attributed to his negotiating powers last week, practically guaranteeing that Saudi Arabia and Russia would cut output to sustain oil prices.

But the fabled meeting was postponed to Thursday and while most of the media attributed the delay to a spat between Russia and Saudi Arabia – caused by Russia really not wanting to cut production – there is actually another, more likely possibility that the two big players are just buying time.

Saudi and Russia produce less oil than the US

Though both countries have phenomenally large production capacities they still produce less oil than the US. However, their costs are significantly lower and both countries know that if oil remains as cheap as it is now other oil producers will go out of business way before they do, starting with US shale, a thorn in both of their sides.

Over the past few years whenever Russia and Saudi Arabia successfully co-operated in cutting output the void created by them was quickly filled by US producers. This has been neither forgiven nor forgotten. Also, with Saudi Arabia able to produce oil at between $8-$10 and Russia at under $20 both countries can afford to sit and wait in the knowledge that some US shale producers are only profitable at over $45/bbl, and already struggling to stay afloat.

At present there is physical oil being offered in the US at prices of below $10/bbl with local traders desperate to shift the oil that they can not sell because of the lock downs across the continent.

The coronavirus has not finished yet with America

The coronavirus has only really properly hit a handful of major US cities and if it continues to progress the way it did in Europe, the US is in for weeks and weeks of hampered travel, curtailed industrial production and shop closures. US demand has weeks to go before it starts picking up, and even then it is unlikely to go back to pre-corona levels very quickly. In that scenario US shale producers will have a very short time during which they will be able to survive.

This explains why Russia is dragging its feet. And although Saudi Arabia didn’t say this publicly, this is also the case for the Arab producer.

Oil investors are enthusiastically positioning themselves for a  clear cut production decision from OPEC and Russia tomorrow that will remove some unwanted barrels from the market and let producers and investors breathe a sigh of relief. However, this game of poker is only half way through and the outcome, and particularly the medium term outcome, may not be what most investors expect.

This article is not investment advice. Investors should do their own research or consult a professional advisor.

Vanya Dragomanovic

Vanya Dragomanovich

Vanya is an award-winning financial journalist who has worked in both television and newswires. She spent over 10 years at Dow Jones covering commodity markets, including metals, coffee, cocoa and oil. She also reported from the floor of the London Metals Exchange, and appeared on CNBC to discuss international metals markets. Since then she has written for several leading financial publications, including serving as commodities editor for FTSE Global Markets.

Vanya continues to cover international commodities markets globally, specialising in particular on metals and alternative energy. She is also the author of a book on CFD trading.

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