Price fixing, once a globally angry specialty in the organization of oil-exporting countries, has been legitimized by the 20 largest countries in the world, but just as OPEC has not controlled the oil market, the G20 will.
Working against today’s G20 agreement to cut production and hope that oil prices will rise are the same forces that have been pursuing oil for a decade. increasing supply and decreasing demand.
Arguing that this time it will be different because more countries are involved in trying to limit supply misses the point where all OPEC members have betrayed past promises to produce less oil and what in The past was difficult for the police to reach, the future will be impossible.
Oil supply cut as Covid-19 cuts demand
Aside from the challenge for large oil producers to quickly cut supply to solve a storage crisis, the even more difficult problem is to boost demand during the Covid 19 pandemic and the related blockages in major economies.
Stabilizing the global oil industry, which has been the primary goal of leading oil producing countries, including the United States, this week is more than a logistical challenge. It is a political nightmare because it requires a high level of trust between EU signatories.
And at this point a pretty obvious question has to be asked: How long has the US been trusting Russia or the prominent OPEC member Iran?
The correct answer is either never or suddenly.
What G20 members, including the United States, had agreed with OPEC showed signs of failure before it was signed with a number of countries, including Mexico. They were deeply unhappy to accept a cut after years of rebuilding their oil industry.
Negative oil remains an option
Last week, one of the industry’s senior citizens, Andrew Gould, warned that trying to limit oil production was pointless as the oil spill threatened to drive the price down in the same way that excess cash led to negative interest rates .
Former chairman of oil services specialist Schlumberger and recently retired non-executive director of Saudi Aramco told London’s Financial Times that no agreement between OPEC, Russia and other producers would work because the decline in global oil demand was too strong.
“OPEC, the so-called central bank of oil, has disappeared,” said Gould.
The leading member of OPEC, Saudi Arabia, which works with Russia and the United States to limit oil supplies, expressed skepticism.
Even strong men have performance limits
“No matter how strong you are before a (Covid-19) pandemic, your power is limited.
“You have to go back to the Great Depression (1930s) to find a time when the market is as free as it is now,” said Gould.
So if the big oil production agreement between a group of countries that don’t trust each other is doomed to fail, how low could the oil price be?
Citi Research, a division of Citigroup Global Markets, announced the international price of oil measured by Brent quality crude oil in a customer announcement earlier this week prior to today’s business announcement.
The number? Amazingly low $ 8 a barrel.
Have you heard of the eagle, the bear and the camel?
Citi described the latest round of meetings as encounters between an eagle (United States), a bear (Russia) and a camel (Saudi Arabia) and said an agreement from May to June is expected to last only three months.
“This would not help eliminate short-term inventory levels or reduce inventory levels as needed in the second and third quarters of 2020,” said Citi.
“This scenario seems to keep prices in line with our basic outlook. Brent for the second quarter is $ 17 / barrel, with a three-month price target of $ 8 / barrel that will return to the high $ 20s in 2021 by year-end and year-end. “
As sobering this view of the oil market is, it could actually be worse, since so much depends on OPEC and other oil producers building a relationship of trust that has never existed in the past – all during the Covid 19 pandemic .