Can the world’s top oil producers save a crashing market?

Saudi, Russia and US will need to forge an unprecedented oil agreement to deal with an unrivalled crisis, say analysts.

The price of fuel outside a Sullivan's gas station in Princeton, Illinois, the United States, where shale producers are hurting and some analysts warn that no deal OPEC can make can ease the pain of an unprecedented demand sap and growing glut [Daniel Acker/Bloomberg]
The price of fuel outside a Sullivan's gas station in Princeton, Illinois, the United States, where shale producers are hurting and some analysts warn that no deal OPEC can make can ease the pain of an unprecedented demand sap and growing glut [Daniel Acker/Bloomberg]

A powerful alliance on the rocks. A market squeezed by falling demand and a deluge of supply. A United States president turned relationship counselor.

This is the backdrop for what is poised to be an unprecedented meeting between Saudi-Arabia-led OPEC, its allies and – should they choose to accept the invite – other top oil producers.

The virtual meeting – originally planned for Monday – is set to take place on Thursday. Whatever deal is struck between the Organization of the Petroleum Exporting Countries and its allies led by Russia – a grouping known as OPEC+ – it will almost surely inform a meeting of Group of 20 energy ministers scheduled for Friday.

The stakes have arguably never been higher for oil companies and for nations that are deeply dependent on crude sales to fund government spending – including expenditures in the battle against the coronavirus pandemic.

Oil prices were already depressed going into this year, thanks to oversupply. That pressure on prices started intensifying as coronavirus containment measures shuttered factories, closed borders, disrupted travel and sent consumers retreating into lockdowns, gutting crude demand.

But the greatest carnage was unleashed in March after Saudi Arabia declared an oil price war in retaliation for Russia refusing to back Riyadh’s calls for deep output cuts to offset the demand blow from coronavirus.

The disintegration of the Saudi-Russian OPEC+ alliance tore through energy markets like a tornado. Crude prices plummeted to lows not seen in nearly two decades, starving the coffers of smaller oil-producing nations that are desperately scrambling for money to fund coronavirus health responses. 

The price war is also posing an existential threat to higher-cost US shale oil producers that have taken on mountains of debt to fund the drilling of new wells.

Faced with the collapse of a domestic energy industry, US President Donald Trump personally reached out to Russian President Vladimir Putin and Saudi Arabia’s de facto leader, Crown Prince Mohammed bin Salman (MBS) to implore them to call a truce and slash output to lift prices.

But sealing the rift between Riyadh and Moscow is not enough to counter the ravages of coronavirus. This unprecedented crisis, oil industry heavyweights and analysts say, requires an equally unprecedented response: nothing less than a global coordinated output cut among all the world’s top producers.

OPEC++

For the Saudis, the price war was a calculated risk. The kingdom can produce oil more cheaply than any other country – for $2.80 a barrel – according to state-run oil giant Aramco. While Saudi Arabia needs oil to trade around $83 a barrel to balance its state budget, Riyadh has ample foreign exchange reserves to keep it afloat through hard times.

Last month, Aramco’s chief financial officer told investors the company was comfortable with oil trading at $30 a barrel.

But that is deeply uncomfortable territory for smaller oil-producing nations, many of which need money to fund a life-and-death battle against coronavirus.

A March analysis by the International Energy Agency (IEA) of the impact the Saudi-Russia price war is having on more vulnerable, developing countries warned that if current market conditions continue, the income those countries derive from oil and gas “will fall by 50% to 85% in 2020, reaching the lowest levels in more than two decades”.

Charging $30 per barrel for oil is also decidedly uncomfortable for US shale oil producers. Many need crude to fetch between $48 and $54 a barrel to break even, according to the Federal Reserve Bank of Dallas.

Global benchmark Brent crude is currently trading around $32 a barrel – roughly half of where it started the year, while US benchmark West Texas Intermediate crude is trading around $25 a barrel – almost a 60 percent drop from January’s opening level. 

A glimmer of hope for those dependent on oil income surfaced last week after Trump took to Twitter to announce that he had spoken to MBS and expected the Saudis and Russians to agree to slash output by 10 to 15 million barrels per day (bpd).

The problem is, coronavirus has destroyed roughly a third of global oil demand – some 30 million bpd, the equivalent of the combined output of the world’s top oil producers: the US, Saudia Arabia and Russia.

On Friday, IEA Executive Director Fatih Birol told Reuters news agency that a production cut of as much as 10 million bpd would still result in a 15 million barrel daily build in the second quarter, and that the only solution is for all OPEC+ and all G20 countries – a grouping industry insiders call OPEC++ – to come together.

But oil-market watchers are sceptical that that level of coordination will materialise. 

“The trick is that Russia, Saudi Arabia and the US would have to agree to it, and how they would divide it. The US government generally doesn’t control production – companies do,” Samantha Gross, an energy security fellow at the Brookings Institution, told Al Jazeera.

A broken model

While US antitrust laws prohibit oil producers in the US from taking steps to cut domestic output to push up oil prices, curbing output is legal if state regulators or the federal government set lower production levels.

Texas regulators are set to meet next week to discuss whether to curb output for the first time in half a century. 

Historical moves are not surprising, given the US shale patch is showing signs of serious distress.

On Tuesday, Exxon Mobil throttled back a multiyear investment spree in shale, liquified natural gas and deep-water oil production, announcing that it is cutting its capital spending this year by 30 percent. And US oilfield services giant Halliburton Co said it would slash about 350 jobs in Oklahoma and that its executives would take a pay cut. 

Last week, Whiting Petroleum Corp, once the largest oil producer in North Dakota, filed for Chapter 11 bankruptcy – the first US shale player to fall victim this year.  

“The core problem is that the US oil industry allowed itself to become dependent on OPEC cutting production to keep oil prices high,” Jim Krane, Wallace S Wilson Fellow for Energy Studies at Rice University’s Baker Institute, told Al Jazeera. “American producers were free riding on OPEC’s sacrifices. That’s a precarious place to be. That model just broke.”

While policymakers haggle, the market continues to decide fates. Producers are running out of places to store oil. Ryan Sitton, one of three elected Texas oil regulators, tweeted on Wednesday that if OPEC+ and other producers do not slash output soon, oil storage will fill up within two months, “at which point the world will need to cut as much as 30m bpd”.

And though Trump has raised the idea of slapping tariffs on foreign crude, on Sunday he appeared to dial back the threat, saying he didn’t think tariffs would be necessary.

“I’m not sure he understands how powerless he is here,” said Gross. “The drop in demand is so large that prices are going to stay low and US producers will suffer, no matter what OPEC does.”

Source : Al Jazeera

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