Usually, it is the world’s largest oil producing countries that penetrate when a large fall in prices falls on the oil market. But these are not normal times.
On Friday, a day after the Organization of the Oil Exporting Countries and other producers led by Russia will hold their own meeting, representatives of the group of 20 rich nations are expected to hold a virtual conference to try to prevent the latest step in energy prices.
The volatile oil markets in recent weeks are threatening to go bankrupt with energy companies all over the world, causing huge job losses and threatening financial institutions that have supported the industry.
It is far from clear that the G20 meeting will calm the volatile markets. However, the fact that the meeting is taking place may signal the beginning of a completely different strategy that can be a first step in restoring confidence.
“Many countries, including those with strong beliefs about free market and information, seem to agree that the global oil company must be managed to an extent, at least occasionally,” said Bhushan Bahree, executive director of IHS Markit, a research firm.
But are the US, Russia and Saudi Arabia ready to agree? The unusual method underlines the turmoil in the markets.
How did the oil markets go up?
Oil demand has evaporated as commercial aircraft are grounded, road traffic has fallen sharply and about half of the world’s population is under some sort of order to stay home to stop the spread of coronavirus, which killed over 82,000 people.
The world uses about 25 percent less oil than it usually does, a shaking collapse in an industry known for only gradual fluctuations in demand.
But the battles among some of the largest producers have exacerbated volatility.
Instead of reducing production to meet the reduced appetite for oil, the Saudis and allied producers increased production in a tiff with Moscow, as an agreement between Russia and OPEC on trimming of production ceased.
This helped drive prices even lower. West Texas Intermediate, the US benchmark, scrapped the $ 20 a barrel rate at the end of March. Some crude oil in the US fell well below $ 10 a barrel. Prices at this level may prove disastrous for the US slate industry – a likely target for Saudi and Russian oil producers.
Facing steep job losses in oil states such as Texas and Oklahoma, President Trump is pushing Saudi Arabia and Russia to end their cheating.
The Saudis, worried about US political pressure, are showing signs of being willing to try to find a solution.
Saudis are thinking, “We must remove the heat from us in terms of American anger,” said Robert McNally, energy adviser at the White House in the George W. Bush administration. He added, “There is a risk of a crime there that Riyadh cannot take too easily.”
The Saudis want to be responsible.
Oil analysts following Saudi Arabia said the price war with Russia had been prompted by frustration by Crown Prince Mohammed bin Salman, the Kingdom’s de facto ruler, with Russia for failing to follow previous production agreements aimed at keeping prices up.
Prince Mohammed could also have looked for other benefits. In the long run, the UK realizes that its huge oil reserves can lose value as concerns about climate change spread, so it wants to get as much from its reserves as possible to invest in other sectors. Prince Mohammed also wanted to chip away the market share held by US shale producers, whose production costs per barrel are much higher than Saudi Arabia’s.
“They do not care if American industry goes down the drain, because it will reduce some production, but they really want Russia to bend to their views,” said Jean-François Seznec, a non-resident senior at Atlantic Council.
But when the price war began by increasing the kingdom’s own production, Prince Mohammed drastically underestimated how strongly the coronavirus pandemic would reduce demand. The move has caused a sense of intelligence among other oil-producing countries, which has led Saudi Arabia to start looking for a new deal on production limits.
“Every oil producer in the world is screaming about this,” said Jim Krane, an energy officer at Rice University’s Baker Institute.
In addition, low prices damage the Saudi economy and reduce the Crown Prince’s resources as he pursues ambitious plans to diversify it away from oil.
Still, if the Saudis manage to convince others to participate in cuts, the pain may be worth it, from Riyadh’s point of view.
The Saudis will “have maintained the principle that everyone must respect their commitments,” said Helima Croft, an analyst at RBC Capital Markets, an investment bank.
Russia wants to slow down the US oil industry.
For years, Russia had looked nervous when a sharp increase in shale production turned the US from a major oil importer into an increasingly important exporter.
According to Russian nationalists, earlier production reductions helped OPEC Russia by raising the global oil price, a critical export, but also helped the US shale oil industry.
Last month, Russia dug in the heels, apparently at the worst time for the oil markets. At a meeting in Vienna on March 6, the Minister of Energy, Aleksandr Novak, refused to agree to a Saudi request for deeper production cuts, and the two countries’ oil policy agreements 2016 were released. The crime gave a victory to Igor I. Sechin, head of the Russian state oil giant Rosneft, which had claimed that price support helped the Americans.
“Is there any point in reducing production in the future if other countries are going to increase?” Mr Sechin asked an interview with Russian state television when oil prices dropped at the end of March.
Russia’s relatively cheap production costs, he said, could also help it stay in a price war with Saudi Arabia.
On the other hand, with prices falling and some US oil producers crying foul and willing to talk, Russian officials are showing at least an interest in going back to the table. On Friday, President Vladimir V. Putin said that Russia was ready to resume cooperation with the Saudis and even to cooperate with the United States. But how much production Russia will agree to reduce remains to be seen.
The US wants low prices, but not so low.
It is difficult to see how a global solution can be reached without the United States, now a top-three oil power.
US producers and the Trump administration share one goal: balancing the market to stabilize oil prices and save the industry from a rash of bankruptcies and the potential loss of more than 100,000 jobs. But there is little common ground on how to do that besides industry support for Trump’s shutdown of Saudi Arabia and Russia to reduce production by 10 million barrels or more.
Trump has long been a critic of OPEC and a cheerleader for lower gasoline prices. Now before US coordination with OPEC, he has signaled opposition to forcing US companies to drop production. However, some seek some form of coordination.
Pioneer Natural Resources and Parsley Energy, two medium-sized Texas oil companies, are calling on the Texas Railroad Commission, the state oil and gas regulator, to demand major production cuts across the state, which is by far the largest U.S. producer. The Commission is planning a hearing on the proposed cuts on Tuesday and a vote on the proposal a week later, well after OPEC and its associated countries meet on Thursday. Only one of the three Commissioners has expressed support for the measure, which Exxon Mobil and other major producers oppose.
“The industry is completely at odds with each other,” said Scott Sheffield, Pioneer Natural Resources CEO.
Mike Sommers, chairman of the American Petroleum Institute, the largest industrial lobby group, said the oil companies opposed tariffs on Saudi and Russian oil – a proposal by some Republicans in Congress – as an intrusion into free enterprise and free trade. On the other hand, Sommers said the current glut was “80 percent a demand issue related to coronavirus,” and that US production would naturally decline as producers cut investment in exploration and production.
“Already production is being slowed down, and I would suspect that much more will be,” he added.
What might be the terms of a deal?
Analysts say that producing countries are working to announce cuts of the order of 10 to 15 million barrels per day.
Precisely where such cuts would come from is likely to be the subject of difficult negotiations.
Relatively uncomplicated clips can be found among OPEC members and member countries. Although coordinated cuts would be unlikely in the US, production could decrease through slower drilling and planned shutdowns.
US oil production fell between January and March by 300,000 barrels per day to 13 million barrels, according to the Department of Energy estimates, and will fall by two million barrels more by the end of the year.
But that may not be enough for Russia, Saudi Arabia and its OPEC allies. On Wednesday, a Kremlin spokesman said natural falls in the United States should not be counted as cuts.
Would it have any impact on oil outflow?
The cuts being discussed would probably only make a modest dent in the oversupply that fills global oil tanks and tankers at sea. Even a cut of up to 15 million barrels “is enough just to scratch the surface,” said Bjornar Tonhaugen, director of oil markets at Rystad Energy, a Norwegian consulting company.
He added that oil storage “could be replenished within 30 days” and cause sudden interruptions in production from Canada to Asia.
On the other hand, while few analysts expect announcements of sufficiently large and verifiable production cuts to remove gluten, the outbreak of activity has boosted prices and led to the dismal mood in the markets.
“The fact that this meeting comes together in such a difficult geopolitical context is a good signal,” said Fatih Birol, executive director of the International Energy Agency, a Paris-based watchdog.