RPT - ANALYSIS - Saudi Arabia Admits Defeat In Oil War By Calling For Urgent OPEC+ Meeting

MOSCOW (Pakistan Point News / Sputnik - 04th April, 2020) Saudi Arabia, the de-facto leader of OPEC, has called for an urgent meeting of OPEC+ oil exporters because it can no longer bear losses from the oil war it unleashed after Russia refused to agree on additional oil cuts last month, experts told Sputnik.

The oil prices have already been affected by the weeks-long outbreak of the coronavirus pandemic, which has significantly reduced air traffic worldwide, shut production and switched employees to working from home, driving demand for jet fuel and gasoline downward.

In early March, the already-weakened prices plummeted to historic lows after Riyadh and Moscow failed to agree on additional cuts or extend the OPEC+ deal, dealing a blow to the market already weakened by a fall in demand due to the pandemic. After the OPEC+ talks failed, Saudi Arabia vowed to flood the market with oil and reportedly started offering barrels to European customers at huge discounts.

However, on Thursday the kingdom called for an urgent meeting of OPEC+ producers to discuss ways to stabilize the oil markets.

The OPEC+ ministers are set to meet via a video conference on April 6, Zamina Aliyeva, the Azerbaijani energy minister's adviser, told Sputnik.

OPEC has still yet to officially announce the date of the meeting, but a source familiar with the secretariat's plans has told Sputnik that the cartel is preparing an address to the oil-producing countries and Secretary General Mohammed Barkindo has been in contact with some OPEC+ members, discussing the details of the potential meeting.

The oil price drop ultimately had a boomerang effect on Saudi Arabia, whose state budget largely depends on revenues from energy exports, Dr. Mamdouh G. Salameh, an international oil economist, told Sputnik.

"The fact that Saudi Arabia called for an urgent meeting of OPEC+ to discuss ways to stabilize the global oil market is an admission of the failure of the oil price war it waged against Russia for refusing to agree deeper production cuts at OPEC+ meeting on the 6th of March ... Saudi Arabia knew that its oil price war will eventually backfire on it," Salameh, who serves as a visiting professor of energy economics at the London-based ESCP Europe business school, said.

Muhammad Sahimi, an expert in petroleum engineering and professor of chemical engineering and materials science with the University of Southern California, in his comments to Sputnik, agreed with Salameh.

"Saudi Crown Prince Mohammed bin Salman began a reckless campaign by ordering Saudi Arabia to flood the market, in order to 'win' its war with Russia, but also hurt Iran's which is exporting small amounts of oil, perhaps 200,000 bbl/day, so that it would deprive Iran of that little income. But, there can be no winner. This is going to hurt Saudi Arabia very badly, just as the crown prince's other reckless campaigns have failed and hurt his nation. Saudi Arabia will have to come to an agreement with Russia, which will benefit all," Sahimi underlined.

Salameh is doubtful that Moscow and Riyadh, at the upcoming OPEC+ meeting, will manage to agree on the measures designed to stabilize the oil market.

"If the OPEC+ meeting called for by Saudi Arabia aims at implementing deeper cuts, Russia won't agree and will maintain its previous position. It may, however, accept an extension of the previous OPEC+ production cut agreement until the end of the year, something it was prepared to do before it was confronted by a Saudi demand for 1.5 mbd cut. Moreover, Russia might agree to delay plans by Russian oil companies to raise production by 300,000-500,000 b/d. I doubt this will satisfy Saudi Arabia and that is why I am not optimistic about the outcome of the meeting," the oil economist said.

The expert went on to doubt US President Donald Trump's claims that Russia and Saudi Arabia may withdraw 15 million barrels daily from the global market to support prices.

"Talking by President Trump about Saudi Arabia and Russia cutting back approximately 15 million barrels between them is a fanciful talk. Furthermore, any agreement on any future cuts without the US shale oil industry making a substantial reduction of its production is a non-starter. A cut of 15 mbd will never see the light of day now or ever. Still, any future cuts will have to include the United States. In other words, neither Russia nor Saudi Arabia will ever allow US shale oil producers to gain market share at their expense and that of OPEC+," Salameh stressed.

A source, familiar with the OPEC secretariat meeting plans, told Sputnik on Friday that OPEC+ oil producers would discuss a potential production cut of 10 million barrels daily.

"As for Saudi Arabia, it has never ever in its history had a production capacity of 12 mbd and will never ever achieve one either. It can at best produce some 8.0-9.0 mbd with another 700,000 b/d to 1.0 mbd coming from storage. This is so because its current production comes from five giant but aging and fast-depleting oilfields discovered more than 70 years ago. So the talk of its willingness to reduce its production to 9 mbd as Dow Jones was saying is a charade, to say the least," the oil economist underlined.

BANKRUPTCY OF US SHALE INDUSTRY HAS BEEN LONG IN THE MAKING

Many observers have perceived the oil war as an instrument to suffocate the US shale oil producers, which, unlike Saudi Arabia and Russia, are unable to bear the low energy prices due to high production costs. The OPEC+ oil cuts agreements have indeed long been considered as a countermeasure to the booming US shale industry.

The first domino to fall was Whiting Petroleum, a large US oil and gas company specializing in shale hydrocarbons. This week it filed for bankruptcy due to the slump in oil prices.

In light of the ailing US oil industry, the White House had to step up its involvement in oil market stabilization efforts and reach out to both Moscow and Riyadh. Russian Energy Minister Alexander Novak said on Thursday that Moscow and Washington shared a common assessment of the situation on the oil market and agreed to work out joint measures to stabilize it.

According to the experts, the future of the US shale oil industry remains uncertain, as even before the slump in oil prices it has been experiencing troubles with profitability.

"The US shale oil industry was on the verge of bankruptcy long before the onset of the coronavirus outbreak. The outbreak has made life unbearable for everyone particularly the shale industry," Salameh said.

The University of Southern California academic agrees with Salameh, saying that more US shale producers may go bankrupt in the foreseeable future.

"If the price of oil stays low for an extended period of time, at least six to nine months, the dominos will fall one after another. Producing fossil fuel from shale makes economic sense only if the price of oil is relatively high and stable," Sahimi said.

One should not expect though that the US shale industry will shut down completely, as the US government will do utmost to support it, Salameh noted.

"The shale industry could emerge from this ordeal leaner with very few drillers who may stay alive longer probably on a life support machine provided by the Trump administration and bailed out for the time being. The Trump administration will never allow the industry to die because of its economic and strategic importance to the United States," the oil economist said.

It is unlikely that Russia, the United States and Saudi Arabia will come to a compromise, as both Moscow and Riyadh will demand to cut shale production, which Trump is likely to refuse.

Thus, the only viable option for the US shale industry is to cut production on its own in order "to help the global oil market and prices stabilize, and recover their recent losses," Salameh concluded.