MOSCOW (Pakistan Point News / Sputnik - 09th April, 2020) Even if OPEC and non-OPEC oil producers manage to agree on new oil production cuts this week, the agreement will prove short-lived and will unlikely salvage oil prices due to falling demand, experts told Sputnik.
Oil prices have been in a downward spiral due to the COVID-19 pandemic, which has significantly reduced air traffic worldwide, shut down production and forced many to work from home, driving demand for jet fuel and gasoline down. Prices dropped even further after the OPEC+ group failed to extend the curtailment agreement and introduce additional cuts in light of the falling demand.
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. Last week, however, Riyadh called for an urgent OPEC+ meeting to discuss ways to stabilize the oil markets after prices fell below the threshold for production costs.
OPEC+ will discuss the possibility of furthering reduce oil production on Thursday, via video conference. The talks will be followed by an extraordinary meeting of the G20 energy ministers on Friday, also called by Riyadh.
US TO INFORMALLY CONTRIBUTE PRODUCTION CUTS
Saudi Arabia and Russia think that the participation of the United States, the biggest oil producing country in the world, is the key to sealing a new deal. This week, US President Donald Trump did not rule out American oil producers joining global output cuts in an effort to stabilize the market, but said that OPEC has yet to ask for this.
But even if Washington decides to join the agreement, its contribution would likely be an informal one. The US producers will essentially slash pumping due to the low demand and high costs of production, experts told Sputnik.
"The US is unlikely to formally join the efforts. Anti-trust law stands in the way, and it is simply impossible to coordinate oil output among the more than 9,000 companies producing oil in the US. The US does not have a National Oil Company like Saudi Arabia. That said, US oil production is set to decline anyway because of low prices, so this might be counted in a creative way as the 'US contribution' to any production cutting scheme that might come out of these talks," Thijs Van de Graaf, an associate professor of International politics at the Ghent Institute for International Studies, told Sputnik.
Jamsheed Choksy, a distinguished professor with Indiana University, agreed with Van de Graaf in his comments to Sputnik.
"Washington has already signaled that, as the world's largest producer of crude oil, it will informally join the efforts to cut production and thereby help stabilize markets. US President Donald Trump stated on Monday April 6 that he believes market forces will ensure 'the cuts are automatic.' The US Energy Information Administration forecast on Tuesday April 7 that American production indeed would decline from its current level of 13.0 million barrels per day to 11.8 million bpd during the rest of 2020 and further to 11 million bpd in 2021," Choksy said.
But even if the US joins Saudi Arabia and Russia in cutting oil production, such an alliance may prove fragile due to conflicting interests, Werner Antweiler, a professor with the Sauder school of business at the University of British Columbia, warned.
"While a production cut would be in everyone's best interest, whether a broad deal of the top three producers emerges also depends on long-term strategic interests, which are not aligned. Even if a deal comes about, it may be short-lived. Saudi Arabia could withstand lower oil prices for much longer than either Russia or the United States. Saudi Arabia will still want to increase its market share, mostly at the expense of the United States producers of shale oil ... Saudia Arabia may concede some of its short-term production targets, but what about the long term?" Antweiler told Sputnik.
The US has an ace up its sleeve, such as the government's bailouts for the ailing US shale industry, according to the expert.
"Saudi Arabia may be underestimating the resolve of the United States to maintain its strategic oil independence. The combination of the price war and the COVID-19 crisis has severely bruised the U.S. oil industry, but the COVID-19 crisis also gives it the unique opportunity to ask for publicly-funded bailouts. A sustained price war could prompt the US oil industry to disconnect from international markets in a profound manner," Antweiler said.
Washington may also hit foreign oil imports with tariffs to protect its domestic production, the UBC professor noted.
"I would consider it likely that the U.S. administration will block foreign oil from reaching U.S. refineries in order to prop up prices and rescue U.S. producers. So while Mr Trump continues to tweet that he expects a deal to cut up to 15 million barrels of output (on what basis exactly?), more cautious U.S. policy makers will actively look for alternative policy options," Antweiler added.
EXPANSION OF OPEC+ UNLIKELY TO RESCUE FALLING PRICES
As Russia and Saudi Arabia say that only a coordinated effort can stabilize the oil market, major oil producing countries that are usually not a part of the OPEC+ group, such as Brazil, Canada and Norway, are also expected to contribute production cuts either informally or as part of the Vienna group effort. However, even if the number of states cutting production grows, they cannot keep up with the falling demand, experts warned.
"We're looking at the biggest demand shock the oil market has ever seen. Oil demand has fallen by more than 20 million barrels per day. Even if the OPEC+ group would somehow manage to agree to a production cut of 15 mb/d (that would be by far the biggest joint cut in history), it would not match demand destruction. It is unlikely to elevate prices in any significant way either. Normally low oil prices boost demand, but due to the governmental lockdowns, this is simply not possible the first couple of weeks and months," Van de Graaf said.
Antweiler agreed that the prospects for market stabilization remained grim.
"I am afraid that any agreement reached this week may ultimately be short-lived because the realities of the oil market are brutal. The cuts may not be enough, and may erode if countries don't stick to commitments. With storage tanks full, markets will remain oversupplied at least through the summer. Cuts will be inevitable, and thus the question is how countries will manage the blow to their domestic economies," the UBC professor concluded.
