Members of the Organisation for Oil Exporting Countries (OPEC), along with Russia, Mexico and possibly Canada as well as Norway, are set to meet virtually Thursday to hash out an agreement to halt the months-long plunge in oil prices. Expectations are low, however, that a deal will be reached to ease a situation sparked by depressed global demand and the ongoing price war between Russia and Saudi Arabia.
The collapse in global energy consumption due to the coronavirus pandemic, combined with a tsunami of supply flooding oil markets, has pulled the floor out from oil prices, in turn forcing the world’s major oil producers to the negotiating table in search of a solution.
Analysts at Emirates NBD, a government-owned bank based in Dubai, have assigned a low probability to an accord being reached, noting that in early March the group, commonly referred to as OPEC+, “failed to endorse even extending the production cuts that were in place for Q1 for the rest of the year”.
“This time the level of cuts would be much more painful for producer economies to bear and there is no guarantee prices would move much higher than their current USD 25-35 per barrel range given how weak demand is as a result of coronavirus-related shutdowns of major economies,” they said in a research note.
Another key factor to any agreement will be the United States and its Balkanised oil and gas sector. News reports indicate both Russia and Saudi Arabia want the US to participate in any proposed cuts in production, to share the load and avoid losing market share.
Leaving aside the fact that US President Trump is lukewarm towards the idea, there is no official mechanism in place for the federal government to impose production limits on private companies. Representatives of the industry have also pushed back against the idea of mandated cuts in domestic oil output. American Petroleum Institute CEO Mike Sommers argued in a televised interview that “markets should dictate production decisions, not government interventions, and that Russia and Saudi Arabia should change their production policies.”
In an opinion piece for WorldOil Magazine, the chairman of the Texas Railroad Commission – regulator of the Texas energy sector – made clear that “I have many reservations about pro-rationing crude oil production in Texas, particularly without enforceable commitments from other states and nations to limit their production by a similar amount.”
The Emirates NBD analysts warn that the difference in the structure of the US oil industry compared to other oil producing countries (which usually have one dominant national entity – think Saudi Aramco) “will frustrate efforts to balance markets through the heavy-handed tool of production cuts,” adding, “The thousands of oil companies that make up the oil industry in the US will not be able to directly participate in OPEC+ negotiations that would parcel out specific production target levels,” while individual companies that can survive on lower prices will be flexible enough to take all of the market share ceded by OPEC and others.
So what then? Emirates believes the wave of bankruptcies that will hit many US shale companies as the oil market craters could be a blessing in disguise. “The US oil industry is of a substantially different nature than the NOCs of OPEC+ producers, with different motivations and constraints. Treating it as though it is like any other oil-dependent economy is unlikely to work in the aim of restoring balance to markets…but in order to avoid repeating the crash/boom cycle of 2015-19 a failure to come to agreement this week may actually be the best result if the objective is to put the US oil industry on its knees permanently,” the research note concluded.