The oil markets are facing their greatest moment of uncertainty in decades before a virtual meeting of OPEC + – the alliance of OPEC and non-OPEC producers – on Thursday, which was delayed compared to Monday due to ongoing disagreements and abrasiveness between some leading member states.
The spotlight will be whether countries can agree to cut crude oil production together to save falling prices if no one buys oil and the world runs out of places to place it.
“Stalemate is not an option for either party,”
“It is against everyone’s interests to oversupply the world,” he said. “There is a common element here and that is that everyone is hurt.”
This is because oil prices have dropped more than 50% since the beginning of the year. The global benchmark for Brent crude on Wednesday is $ 31.94 a barrel and for US West Texas Intermediate is $ 24.18 a barrel at 9:00 a.m.CET.
As a precaution, the OPEC + meeting will be held by video conference in the midst of the coronavirus pandemic, which has wiped out global oil demand and virtually closed the world’s major economies.
At the same time, leading producers in Saudi Arabia and Russia are in a price war, with production increasing or sustained to increase their market share, while US slate companies pump at record levels. Oil prices are at their lowest in nearly two decades, leading to massive investment and job cuts across the U.S. shale basin, where costly operations are no longer economically viable.
But the market share strategies of Russia and Saudi Arabia will also be painful, said Saleri. “The economies of Saudi Arabia and Russia are all affected by oil prices.”
If Saudi Arabia and Russia – as President Donald Trump has asked them – want to reduce their production, they want the United States to play their part in the reduction. The tense dynamics of large egos and external relations among the world’s heavyweight energy players will now determine the future of the entire global oil industry.
Everyone’s skin in the game?
That now means not only OPEC + producers, but also the USA, Canada, Norway and Brazil. In the United States, production levels are set by individual companies, which makes centralized editing extremely difficult – and Trump has made it clear that he won’t. But American executives are now demanding cuts in industry in line with market forces.
“Capacity needs to go offline,” Exxon Mobile CEO Darren Woods told CNBC’s Squawk Box on Tuesday. “There will be an economy that will force producers to get involved … frankly, because there is no demand for the product, so you have to stop making it at some point.”
Exxon Mobil and Chevron cut their investment by 30%, which mainly affects operations in the slate Permian basin of Texas, as do numerous other US companies.
Such reductions have a direct impact on US oil production, which OPEC may only accept as a cut, according to RBC’s Helima Croft.
“I think OPEC will try to count these reductions,” said Croft, head of raw materials strategy at RBC Capital Markets, on Tuesday. “Can you describe your investments as a cut? I think OPEC will be flexible about what makes a cut.” This will likely be a focus for the U.S. Secretary of Energy when the G20 energy ministers meet this Friday.
Even if an agreement is reached, experts can do little to improve the markets given the deterioration in demand caused by the coronavirus pandemic.
“Low probability that a deal can be made”
“We assign a low likelihood that an agreement to reduce production can be reached,” Edward Bell of Dubai-based Bank Emirates NBD wrote in a report on Wednesday. “The positions of the main players, especially Saudi Arabia and Russia, have not changed.” Saudi Arabia refuses to take on the heaviest cutting load, as has been done in the past, and the rhetoric between the two has deteriorated.
An earlier deal on production cuts between OPEC and non-OPEC members, led by Russia in March, collapsed when Moscow refused to agree to Riyadh’s terms, triggering a U-turn in Saudi politics and a race for more crude oil for more customers triggered.
An agreement on Thursday must be in everyone’s interest, but the cheaper producers Saudi Arabia and Russia may not even have an incentive to reduce their production, argued Chris Midgely, head of analytics at S & P Global Platts.
“If the cut in production only supports the back of the curve” – eventual price increases as demand recovers – and not immediate buying, then there is little incentive for Russia or Saudi Arabia to cut production, “Midgely said towards CNBC if this is already the case gaining market share.
Saleri, the former managing director of Aramco, disagrees. Aside from egos and stubbornness, the current trajectory will inevitably hit a physical wall.
“Global capacity to hold oversupply is limited … everything is filling,” he said. “Oil won’t find a place to go.”