IEEJ：April 2020 ©IEEJ 2020
Special Bulletin
A Japanese Perspective on the International Energy Landscape (474)

April 3, 2020

Great Oil Price Uncertainties despite Rally on Potential Production Cuts
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, JapanOn April 2, crude oil futures staged a steep rally. The front-month West Texas Intermediate
futures contract closed at $25.32 per barrel, up $5.01/bbl or about 25% from the previous day. The
front-month Brent futures contract also scored a steep gain of $5.20/bbl or about 21% to $29.94/bbl.
The sharp rally, though leaving oil prices still below $30/bbl, has attracted attention from market
participants as a dramatic change.
Behind the steep rally are hopes that oil-producing countries would reconstruct their joint
production cut initiative that has collapsed. Triggering the hopes was U.S. President Donald Trump’s
Twitter message that he expected Saudi Arabia and Russia now in a price war to cut oil production by
about 10-15 million barrels per day. The message came after his telephone talks with Saudi Crown
Prince Mohammed bin Salman and Russian President Vladimir Putin and triggered the hopes on joint
production cuts.
Furthermore, reports say that Saudi Arabia has proposed that the Organization of thePetroleum Exporting Countries and non-OPEC oil producing countries including Russia hold an
emergency meeting to discuss how best to stabilize the oil market in response to an oil price crash thathas come as global economy risks have grown serious on the expansion of the new coronavirus disease
known as COVID-19. Future OPEC-plus talks will thus attract great attention.
Crude oil prices plunged into a free fall in March. At a time when the international oil market
was in oversupply due to growing U.S. shale oil production, a global economic slowdown and city
lockdown amid the expanding COVID-19 pandemic sharply reduced oil demand and boosted
oversupply further. Accelerating the oil price downturn was the collapse of the OPEC-plus joint
production cut initiative and a subsequent race to expand production in a price war.
During the free fall, the key WTI futures price suffered a sharp daily fall of more than
$10/bbl to $31.13/bbl on March 9 following the collapse of the joint production cut initiative on theprevious trading day. Furthermore, WTI slipped below $30/bbl amid the expansion of the COVID-19
pandemic, hitting a low of $20.09 on March 30. Market participants then were concerned that the pricewould decline below $20/bbl or post an even steeper fall and remain weak over a long term if the pricewar continues, with the pandemic worsening.
While governments in the world are making desperate efforts to stabilize the situation
regarding the COVID-19 pandemic, no path to the end of the pandemic has come into sight. The
pandemic is likely to keep downward pressure on oil prices over a long time. Theoretically, one of thebiggest factors to support or boost oil prices amid such situation is the reconstruction of the OPECplus joint production cut initiative. This is the reason the oil market reacted to President Trump’s
Twitter message and the proposal for OPEC-plus talks.
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As noted in the 471st issue of A Japanese Perspective on the International Energy Landscape,Saudi Arabia might have intended to tolerate sharp oil price falls once and lead the negative effects of
weak oil prices to be shared among oil-producing countries anew before reconstructing the collapsed
joint production cut initiative. Oil prices’ plunge to the brink of falling below $20/bbl might have led
oil-producing countries to become concerned about oil prices’ further deterioration, bringing about thelatest developments.
Interestingly, the United States is among oil-producing countries that shared the strongest
pains of falling oil prices. Unlike Saudi Arabia or Russia, the United States does not depend on oilrevenue for national finance. It does not have to consider keeping oil prices at certain levels to balance
its national budget. As shale oil production or shale revolution progress has supported U.S. prosperity
and national power expansion until recently, however, the oil price crash amid the COVID-19
pandemic came as a strong pain for the United States, particularly the Trump administration. The oil
price plunge has hard hit the U.S. oil and gas industry, leading some shale companies to fail. Oil prices’
fall induces a gasoline price decline that is politically and economically positive for the United States.
Now that the oil price crash has seriously affected the oil and gas industry having contributed much toU.S. economic prosperity and national power expansion and invited a stock market crash, however,President Trump might have acknowledged that the current situation is unignorable.
For Saudi Arabia, U.S. shale oil is a strong rival from the viewpoint of international oil
supply and demand. Shale oil production expansion forces Saudi Arabia to cut production and lose its
market share. If an oil price crash works to cap growth in high-cost U.S. shale oil production, it would
be favorable for Saudi Arabia. However, it is difficult for Saudi Arabia or its Crown Prince Mohammedbin Salman to turn down a strong request from President Trump. This is because the United States is
the most important superpower for Saudi Arabia’s national security and President Trump has supported
and maintained close, good relations with Crown Prince Mohammed bin Salman.
Attracting attention next would be Russia’s response. Russia’s refusal to enhance the OPECplus joint production cuts has triggered the collapse of the joint production cut initiative. The refusal
is apparently based on a strategic recognition that the enhanced production cuts would eventually
benefit high-cost U.S. shale oil production to the disadvantage of Russia. It is uncertain whether Russia
would come back to the joint production cut initiative in response to President Trump’s request. As far
as skepticism and uncertainties remain about Russia’s comeback to the initiative, oil prices may remain
unstable.
When Russia rejected the enhanced joint production cuts and walked out of the OPEC-plus
meeting on March 6, it indicated that it was more resistant to low oil prices than Saudi Araba. Russia
has assumed that oil prices around $40/bbl would be required to balance its 2020 budget, slipping far
below more than $80/bbl as assumed for Saudi Arabia. Some analysts pointed out that Russia would
resist weaker oil prices by dipping into funds accumulated when oil prices were high. However, I thinkthat the reality surrounding Russia is no longer favorable. Oil prices have slipped below $30/bbl,indicating that the Russian budget would fall far short of being balanced and that Russia’s economic
growth would be seriously affected. Europe, a major oil and gas export destination for Russia, hasbeen seriously hurt by the COVID-19 pandemic, dealing a severe blow to Russia. Furthermore,
Western economic sanctions have made international fundraising more difficult for Russia than for
Saudi Arabia. The latest oil price crash has thus been very painful for Russia as well, requiring Moscow
to seriously consider countermeasures.
We will have to closely watch future bargaining among the United States, Russia and Saudi
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Arabia as the world’s three biggest oil producers regarding not only their influence on the internationaloil market supply-demand balance but also international relations and geopolitical issues.

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