BAKU, Azerbaijan, April 7
By Leman Zeynalova - Trend:
The demand collapse triggered by the outbreak and spread of Covid-19 makes such an agreement more likely, Trend reports citing Fitch Solutions Country Risk and Industry Research (a unit of Fitch Group).
“At the nadir, the market could face surpluses in excess of 20.0mn b/d, as consumption caves in and Saudi Arabia rapidly raises its supply. This will put the market under extreme physical pressure and, while it is unlikely that nominal storage capacity will be breached, it is possible that the sheer scale of the oversupply will overwhelm global logistics chains, plunging Brent into single-digit lows,” the company said in its report.
Fitch Solutions believes that rapid production shut-ins would prevent prices from lingering at this level for any sustained period of time. “However, unless a new production cut deal can be agreed, any recovery in price will necessarily be limited. As pressure on the market mounts, so does the pressure to find some form of compromise. That said, while the fiscal strains on both Saudi Arabia and Russia will be severe, their low production costs and ample fiscal reserves give them scope to resist any new agreement in the near term.”
“Both countries have the fiscal buffers in place to withstand a multi-year slump in prices, but these buffers are of huge strategic import and they will not expend them lightly. Saudi Arabia’s foreign exchange reserves were significantly depleted during the last downturn and they have not had time to replenish them. They can reduce their spending, but the scope for such a reduction is limited, particularly in regards social spending. A very low debt-to-GDP ratio leaves room to tap the global capital markets to help offset the shortfall in revenues. Nevertheless, some run down of their reserves will be required in order to plug a yawning budget deficit and defend the currency peg.”
Russia has a more diversified economy and so is less dependent on its oil revenues, according to Fitch Solutions.
“It also enjoys a floating currency, which can help provide some offset to USD-denominated declines in the oil price. However, excessive ruble weakness harms domestic businesses and consumers, which rely on access to imports, and the government will likely have to intervene to stem the rout, should it continue. The economic outlook has also deteriorated sharply over the past month and Russia is now facing a recession, with our Country Risk analysts forecasting a 1 percent y-o-y contraction in real GDP this year. While we believe it would be in the interests of both parties to reach a new agreement, it is hard to see how such an agreement could be formed without either Russia submitting to a cut or Saudi Arabia opting to cut independently of Russia. This would entail one of the two producers climbing down from their previous positions. The spread of Covid-19 and the severity of its impact on global oil demand may provide them the cover under which to do this without losing face, although neither side has shown much willingness to do so to date,” reads the report.
---
Follow the author on Twitter: @Lyaman_Zeyn