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Oil markets are a mess. Can world leaders shave them off?



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.

The pandemic has played a crucial role in this drama, but there is also a lot of jockeying among the three oil superpowers: Saudi Arabia and Russia, two longtime petro-rivals, and the United States, whose rising prominence as an oil exporter has disturbed 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.

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.

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.

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.

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.

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.


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