|
Oil market still uncertain
Production and demand slump forecasts decrease, but prices remain jittery Alan Bailey Petroleum News
Following a few weeks of worldwide turmoil in response to the potential collapse of the global oil market because of grossly excessive oil supplies, on April 12 the Organization of Petroleum Exporting Countries and Russia finally signed an agreement to cut about 9.7 million barrels per day of production in May and June. The production cuts come in response to a collapse in oil demand as a consequence of the Covid-19 pandemic. An oil price war between Saudi Arabia and Russia had greatly exacerbated the problem. President Donald Trump was strongly involved in persuading the relevant parties to restore stability to the market.
“The people whose lives depend on this vital industry, many of whom work in our home countries, are waiting on us; the entire oil sector is expectant; the whole world is watching us,” said OPEC Secretary General HE Mohammad Sanusi Barkindo during the April 12 meeting.
Other non-OPEC oil producing countries, including Norway, Canada and the United States, also envisage significant production cuts, in response to the dramatic lowering of oil prices following a sharp fall in oil consuming activities. On April 13 Roger Diwan, vice president, financial services, for IHS Markit, commented that the total overall supply drop could amount to as much as 14 million barrels per day in May and June. An April 13 article in the Financial Times indicated that a drop of more than 15 million barrels per day is possible, and that OPEC delegates had suggested that the purchase of oil for filling various strategic national reserves could cause the overall global supply to drop by as much as 20 million barrels per day.
Uncertain impact The impact of the production cuts on the oil market is subject to significant uncertainty, both because of uncertainty over the total production cuts that will emerge, and over the ultimate impact of Covid-19 on oil demand. The demand drop has been estimated to potentially be as high as 35 million barrels per day. However, on April 12 Diwan indicated that the drop might be 20 million barrels per day. Wood Mackenzie has predicted a fall in demand of 15 million barrels per day in April, with demand recovering somewhat later in the year. The Financial Times has reported that oil traders have considered a demand drop of up to 30% - according to the Energy Information Administration, global oil demand in 2019 was around 100 million barrels per day.
And, presumably in anticipation of oil demand starting to recover as countries “flatten the curve” of Covid-19 infections, OPEC and Russia agreed to gradually relax the production cuts. From July 1 to Dec. 31 the cuts will fall to 7.7 million barrels per day, then dropping further to 5.8 million barrels per day over the subsequent 16 months. Thus, the agreement will end on April 30, 2022, albeit with a review in December 2021 over whether to extend the agreement.
Given the uncertainties in the data and questions over whether the production cuts will be sufficient, the oil market remained jittery following the April 12 OPEC and Russian agreement. After a short rise in the price after the announcement of the agreement, the price juddered downwards. By April 15 Brent Crude had slipped to $27 per barrel, while West Texas Intermediate had dropped to $20 per barrel.
Production quotas Since the beginning of 2017 OPEC and some non-OPEC countries, in particular Russia, have been operating a system of oil production quotas, holding down oil production to try to stabilize the global oil price at a level that is both profitable and maintains the countries’ economies. In early March, as the Covid-19 pandemic was crushing oil demand, Saudi Arabia proposed additional production cuts of 1.5 million barrels per day. Russia, however, refused to cooperate. In retaliation for Russia’s response, on March 8 Saudi Crown Prince Mohammad bin Salman bin Abdulaziz Al Saud ordered Saudi Arabia’s oil production to increase by 2.5 million barrels per day, starting in April. The impending flood of oil, coupled with elevated marine transportation pricing, triggered a collapse in the global oil price, with the specter of negative oil pricing as available oil storage fills. Both Russia and Saudi Arabia claimed that they could sustain the low price scenario for an extended period of time.
According to a CNBC report, Russia said that it could increase its oil production by 200,000 to 300,000 barrels per day in the short term, and by 500,000 barrels per day in the long term. The United Arab Emirates said that it could increase its production by 1 million barrels per day, the CNBC report said.
Reaction to price war On March 20 a group of U.S. senators, including Alaska’s Sens. Lisa Murkowski and Dan Sullivan, sent a letter to U.S. Secretary of Commerce Wilbur Ross, urging an investigation of the flooding of the oil market by Saudi Arabia and Russia.
On April 1 the global oil price hit an 18 year low. Thus, with prices falling below viable levels in many major oil producing regions, much of the global oil industry came under threat.
President Trump became involved in the debacle, stepping in to push Russia and Saudi Arabia into making production cuts. At one point Russia indicated that it would agree to reduce its oil production if the United States would do the same.
A new agreement Then, on April 10, OPEC and most of its allies agreed on a total production cut of 10 million barrels per day. However, Mexico declined to contribute its share of the proposed cuts. On that same day an online meeting of energy ministers from the G20 countries supported the OPEC proposal by emphasizing the need to stabilize the energy market through international cooperation.
“The impacts on energy markets, in turn, further deepen the global economic crisis and hinder sustainable development,” the ministers said, reflecting on the ramification of the Covid-19 pandemic on the those energy markets. “We agree that ensuring energy market stability and ensuring affordable and secure energy are key in addressing the health, well-being and resilience of all countries throughout the crisis response and recovery phases.”
And on April 11 a group of U.S. senators, include Sullivan, conducted a call with Saudi Arabia Energy Minister Prince Abdulaziz bin Salman Al Saud and Deputy Defense Minister Khalid bin Salman bin Abdulaziz Al Saud, urging the importance of stopping the oil price war. In late March Sens. Sullivan and Cramer had introduced legislation to relocate U.S. troops away from Saudi Arabia, in response to Saudi Arabia’s destabilization of energy markets.
On April 12 a meeting of OPEC and its allies finally made the agreement over production cuts. A compromise agreement with Mexico resulted in cuts of 9.7 million barrels per day, a little below the 10 million barrels per day that had originally been envisaged.
|
