Slugcatcher on the weekend oil deal which is doomed to fail

THE weekend deal to trim global oil production by 9.7 million barrels a day wasn’t so much a drop in the bucket as what Slugcatcher sees as an attempt to prevent an already full bucket from overflowing – but will it work?
Slugcatcher on the weekend oil deal which is doomed to fail Slugcatcher on the weekend oil deal which is doomed to fail Slugcatcher on the weekend oil deal which is doomed to fail Slugcatcher on the weekend oil deal which is doomed to fail Slugcatcher on the weekend oil deal which is doomed to fail

Demand destruction aside, when did the US ever trust OPEC? 


No-one will know the answer to that question for at least a few weeks because the production cuts don't start until May and are only scheduled to last two months before diminishing progressively and expiring in two years.
An optimist might see a chance for the oil market to recover as some of the current surplus is removed, but a pessimist would be inclined to say too little, too late, and that's probably correct because 9.7 million barrels a day sounds a lot, but is not.
According to a one recent analysis, global oil consumption has crashed by 30 million barrels a day.
More importantly, the cause of the crash has not gone away with much of the world in some form of lockdown to try and prevent the spread of the virus which is the cause of the respiratory disease COVID-19.
And that's where the real problems lies because the oil price is unlikely to stage a sustainable recovery until the global economy overcomes the biggest economic shock since the Great Depression of the 1930s.
That reality is dawning on oil traders and the politicians who are claiming victory over the glut: the price of oil is unlikely to show much more than a modest bounce that might last a few weeks.
Well-regarded investment banks have started to weigh in with their verdicts and they're not encouraging.
Goldman Sachs described the cuts as "historic yet insufficient", adding that after even assuming full compliance the oil glut would continue to grow.
Citi said the cuts might play "a small role in limiting inventory build-up" in the current quarter but should have an impact on reducing inventories and raising the oil price into the mid-US$40s or higher by the end of the year.
But even if there is an oil-price recovery there is no escaping the biggest problem of all, peak oil demand, that extraordinary reversal of a theory which started out as peak oil supply.
So, what exactly happened over the Easter holidays when half the world was locked down to prevent the spread of the coronavirus?
As far as The Slug can tell there was a combination of arm-twisting by the US President, Donald Trump, as he urged Saudi Arabia to end its price war with Russia, and with Russia showing the first signs of panic as its finances turned from grim to dire.
The US vs Saudi situation is best explained as a case of reality dawning on Saudis that they were starting to inflict damage on the US oil industry while expecting the US army to remain its protector against Iranian aggression.
The Russian position has not yet been fully explored, largely because the country remains a riddle, wrapped in a mystery inside a puzzle, as Winston Churchill so aptly described a country which remains captive to its unfortunate history.
There is, however, a number which explains why Russia was keen to join the global oil cuts --- $7 billion - the amount of foreign cash reserves accessed in March by the Russian central bank as it ate through reserves to try and compensate for lost oil revenue.
It's also worth noting that a few weeks before the central bank dipped into what are effectively Russia's national savings the same bank stopped buying gold from local miners, something it has been doing for years to bolster its reserves.
In other words, the Russia government knows that without a higher oil price the country is moving quite quickly towards a financial cliff caused by an over-reliance on oil revenue and a failure to develop a more diversified economy.
When Trump phoned his Russian counterpart, Vladimir Putin, over the weekend to urge him to join the oil cuts he would not have had to sell the case because Putin was keen, perhaps desperate, to do whatever it took to achieve a higher oil price.
Comments about the low price of the past few months damaging high-cost US shale-oil producers missed the key point in the Russia v US situation, as though the US might take a hit on one of its industries, Russia is taking a battering to its entire economy.
Other oil-producing countries, such as Brazil, Egypt and Mexico, have also been forced to dip into their reserves to offset the losses being incurred by the low oil price, but nothing compares with Russia's losses - and almost certainly those of Saudi Arabia.
Now comes the critical question which has been amusing The Slug since he first heard about a production reduction agreement: how can it be enforced?
Think about it for a second because there are two reasons for doubting that this deal will last any longer than other oil-cut agreements involving the unsavoury characters who run OPEC, an organisation built on foundations of bog-standard blackmail.
Past promises by OPEC members to abide by output cuts have always failed because someone (or everyone) cheats.
Just because there are more signatories to the latest deal will not prevent the same result, and perhaps even make failure faster.
And the reason for being so confident that failure is certain can be found in this simple question - when did the US start trusting Russia?
Or, more to the point, when did the US start trusting that foundation member of OPEC, Iran?
Never is not a bad answer to the trust question.