Argus Live: US, Russia rivalry poses recovery risk

The global economy is poised for a strong rebound but geopolitical intrigue between the US, Russia and Opec+ nations might mean a bumpy recovery for the oil and gas industry, a group of economists told the Argus Live Crude Summit today.

After a disastrous 2020, when the Covid-19 virus wreaked havoc on consumer spending and business activity, the global economy will regain its strength, especially in the second half of this year. China, along with developing countries in Latin America, will lead this recovery, the economists said.

"The economy is starting to fire on all cylinders," said Saad Rahim, chief economist of Trafigura. "I see some real growth upside here."

Eirik Waerness, chief economist of Equinor, said consumers have "pent up savings" to start buying cars, clothes and computers again, which means companies throughout the supply chain will need oil and gas to make and transport those goods.

"Construction, infrastructure, manufacturing shall have a great demand pull there," Rahim said.

But one wild card in this recovery is Russia and Opec+. Throughout last year, Saudi Arabia and Russia have clashed over when to increase production. Earlier this year, Saudi Arabia decided to voluntarily cut 1mn b/d in response to support prices.

But Russia wants to ramp up production and not just for economic reasons, said Helima Croft, managing director and global head of commodity strategy at RBC Capital Markets.

Croft said that Russia wants to prevent US shale producers from regaining dominance, especially if the US slaps economic sanctions on it for cyberattacks and interfering with elections. The Biden Administration will likely be "very tough on Russia," she said.

"Russia is tried of opening a lifeline to shale producers and enabling American energy dominance," Croft said. "They are tired of a situation where the US would grow and they would get sanctioned."

So Russia is thinking ‘if we don't put more barrels on the market, then somebody else will,'" Croft said, referring to US shale producers.

But Michael Cohen, chief US economist and head of oil analysis at BP, said the US oil industry is hardly homogeneous group that acts in unison, especially with production strategies.

He noted the major independents have clearly said they have no interest of "growing into an oversupplied market." The real question is what the privately-owned firms and US majors like ExxonMobil and Chevron will do because "they can easily ramp up spending in the Permian" basin.

Still, Cohen thinks US producers will continue to grow at a steady pace of 100,000-200,000 b/d per year for the foreseeable future.

By Thomas Lee