OIL markets are faced with a triple and not double whammy. Demand destruction was already in place. Coronavirus pandemonium only accelerated it. And then the outbreak of price war between Russia and Saudi Arabia only helped to worsen the scenario.

The industry stood decimated.

And in the midst of all this, US President Donald Trump says, he would ‘intervene at an opportune time.’

The signal gave market prices the much-needed lift - albeit for a short period. On Thursday, WTI, the US crude, went up by almost 24 per cent – the largest single rise in a day.

What spurred Trump to get into action? The new strategy emerged after lobbying from US oil companies, asking for the Trump administration to ramp up its diplomatic intervention in the oil markets.

Trump needed to comply. The Wall Street Journal reported via communications through the State Department and National Security Council, the US could ask Saudi Arabia to revisit plans to hike output. And, in order to push Russia to agree to a compromise on the issue, the story, citing an unnamed administration official said, the US was weighing potential sanctions against Russia.

Would Trump succeed? A difficult call to respond.

One needs to look at the objectives of the two countries, Russia and Saudi Arabia, involved in the ongoing ‘war of nerves.’ Russia definitely wanted to hit the US shale industry. And although publicly Saudis were just vying for higher prices to balance their budget yet, some say, this war is also for the dominance of the oil markets and to engineer structural changes in the market.

In order to step back from their respective positions, both countries would need face-saving measures. For President Trump to handle all the variables in the equation may not be easy, if not impossible.

For the US President to succeed, from the Russian perspective, the US output should also be part of it. Russia had underlined it in clear terms, Kremlin was not ready to give more room for the US producers to gain market share while they continue to slash output to balance the markets.

Further, Kremlin would still like winning some concessions – such as an end to the US sanctions on Nord Stream 2 and Rosneft.

From a Saudi perspective, the burden of cutting output needed to be shared, between the stakeholders, and if somehow the US producers also get into the arrangement that would be an added blessing.

For political reasons, Riyadh cannot push Washington to join the club, yet reports have been insisting in recent days; there was a convergence of interest between Riyadh and Moscow on the issue. Financial Times, quoting a Saudi source close to the royal court, said it was in Saudi Arabia’s interests to “allow this thing to go on for a while to bring structural change to the industry”.

“Get rid of weak shale players and send a message to Teslas of the world and alternative energy, there’s a lot that could change the whole picture of oil,” FT quoted the person as saying. Can Russia be bullied to give in – as President Trump is asking for? It seems no. President Vladimir Putin will refuse to submit, signaling the price war that’s roiling global energy markets will continue. “Putin is known for not submitting to pressure,” Alexander Dynkin, president of the Institute of World Economy and International Relations in Moscow told Bloomberg.

For Putin to retreat from his declared position and Trump to succeed, the US will hence need to make concessions on the shale front.

That doesn’t seem as farfetched an idea, as it was until recently. In a Bloomberg op-ed, Ryan Sitton, of the oddly-named Texas Railroad Commission (TRC) that regulates oil in the US’s largest producing state Texas, has suggested that Texas, Saudi Arabia, and Russia, all cut output by 10pc.

The state produced 5.35 million barrels per day in December. Scott Sheffield, chief executive of Pioneer Natural Resources, a large shale oil firm, has reportedly spoken to the Texas governor about offering such production restrictions in negotiations with Riyadh and Moscow.

Such a move would not be totally unprecedented. In December 2018, faced with limited pipeline export capacity, the Canadian province of Alberta mandated an 8.7pc cut in production, now extended till the end of this year. This successfully reduced discount for Albertan crude, Robin Mill recently said in one of his pieces.

Is Tropec — Texas-Russia-Opec — in the making? To many, that is the best option available at the moment. In a fragmented crude world, with multiple power centres, nothing seems impossible at this juncture.

Published in Dawn, March 22nd, 2020