The current infighting between the biggest OPEC+’s oil producers -Saudi Arabia and Russia- which contributed to the recent collapse of oil prices does have a positive aspect to the oil market provided that both KSA and Russia eventually agree to cut output.
How is that so? Here is how:
Had Saudi Arabia and Russia agreed to continue to cut their oil output during their meeting early March 2020, there was no way oil prices were going to increase. This is simply because the positive impact of OPEC+ oil output cuts were already priced in.
In fact, not only was it priced in, but its effectiveness in supporting oil price was deteriorating. The only job oil output cuts was going to do is to desperately try to maintain oil prices where they were. But again, that was going to be next to impossible, because at that time, the impact of coronavirus on oil demand, and the energy sector as a whole was getting worse. I am pretty sure Saudi Arabia and Russia knew that.
That means, despite OPEC+ agreeing to continue its oil output cuts, oil prices were eventually going to go down.
Now imagine oil prices falling down to $30/bbl-$40/bbl price level while OPEC+ biggest producers are still in agreement to continue to cut their oil output.
Had that happened, it was going to be extremely difficult for oil prices to pick up again and go back to $50/bbl-$60/bbl level once the world economy recovers from the impact of coronavirus crisis. Because the positive impact of oil output cuts were going to be priced in, and OPEC+ would have no room to further cut its oil output.
What about now?
Now the situation is different. Yes, oil price fell sharply below $30/bbl, but the main driver for this trend is not just coronavirus negative impact on global economy, its is also the absence of positive impact of OPEC+ oil output cuts.
Once the negative impact of coronavirus on the global economy starts to fade away, and markets start picking up, oil price will begin its upward trend. All of this could happen without the support from OPEC+ oil output cuts.
And if suddenly Russia and Saudi decided to get back on truck with output cut deal, then that is where oil price will jump back to $50/bbl-$65bbl level.
This begs the question:
Is the current infighting between Russia and Saudi Arabia real? Or is it part of a bigger game.
