US President Trump said that Saudi Arabia and Russia will cut oil production by 10-15 million barrels per day and “maybe substantially more,” on Thursday, following a collapse in prices due to a price war and demand breakdown due to the coronavirus pandemic.
Just spoke to my friend MBS (Crown Prince) of Saudi Arabia, who spoke with President Putin of Russia, & I expect & hope that they will be cutting back approximately 10 Million Barrels, and maybe substantially more which, if it happens, will be GREAT for the oil & gas industry!— Donald J. Trump (@realDonaldTrump) April 2, 2020
The Kremlin later denied that Russian President Putin had been in contact with Saudi Arabia's Crown Prince Mohammed bin Salman, AFP reported.
.....Could be as high as 15 Million Barrels. Good (GREAT) news for everyone!— Donald J. Trump (@realDonaldTrump) April 2, 2020
Oil prices surged directly after Trump's tweet, with Brent crude futures up 21 percent to around $30 per barrel, and WTI crude up over 23 percent, to around $25 per barrel.
Prices had collapsed after Russia failed to agree to a further oil output cut with the Organization of Petroleum Exporting Countries (OPEC) in early March, triggering an oil price war for market share.
Saudi Arabia later announced plans to hike output by 2.5 million barrels per day (bpd) to 12.3 million bpd, with other producers, including the UAE, announcing they too would increase production.
US shale oil firms have been among the first to suffer the low price environment, as unlike many other firms they cannot rely on state support. The companies have a significantly higher price at which they can pump oil out of the ground at between $43 to $55 per barrel – compared to Saudi Aramco, the cheapest producer, at just around $3 per barrel.
Russia’s motivation for breaking with the three-year OPEC+ arrangement, however, was likely aimed at US shale oil producers. Shale oil has come to dominate markets in recent years – the US moved to become the biggest exporter of crude in the world. However, shale oil firms are highly leveraged, and have high breakeven figures as a result to service debt.
“Russia’s decision to pull out of the OPEC+ agreement triggered the price collapse, and was squarely targeted at the shale sector given its current financial distress,” said MUFG Bank in a recent report.