By on April 7, 2020

The world’s largest oil producers are meeting this week for negotiations aimed at saving the energy sector a lot of hardship further down the road. That includes the Organization of the Petroleum Exporting Countries (OPEC), which has been at odds with itself more than usual of late. Hampered by dwindling demand, member countries are suffering and aren’t sure what’s to be done about last month’s price plunge and surplus of crude.

During the cartel’s last meeting, Russia declined to collaborate with OPEC’s planned production cuts. This sent Saudi Arabia into a furious tizzy; it quickly attempted to flood the market with bargain oil in an attempt to drive out lesser players. Like everything else, this was further complicated by the global pandemic. The coronavirus has suppressed oil use to a point where suppliers are growing concerned about storage capacity running out. 

Meanwhile, OPEC is still interested in competing with U.S. shale oil producers for market supremacy, though WTI pricing per barrel was effectively halved through the first few weeks of March as COVID-19 started convincing local governments to demand people stay indoors.

Undercutting the United States seems a tall order. It seems unfathomable that OPEC could do anything but aggressively cut production during a period where the world doesn’t need much oil. America has already tamped down production immensely. On Tuesday, the U.S. Energy Information Administration cut its oil output forecast by almost 10 percent. It now expects the country to pump around 11.8 million barrels in 2020.

“In the United States, we are buying at levels close to zero but because of various pipeline, bank commitments they continue to sell. They keep on going because they hope when demand is back, they can come back to life. So shale is very resilient,” Marco Dunand, chief executive of Mercuria Energy Group, told Reuters in a recent interview.

Last Thursday, President Trump said he expected Russia and Saudi Arabia to announce production cuts of up to 15 million barrels per day — giving oil futures a major boost before they returned to the slide. It’s assumed that shale companies need prices of at least $40 per barrel to cover the costs of doing business. This has led some to speculate about which countries can endure a worst-case scenario the longest — none of which seem to be entering the situation from a position of dominance.

OPEC and its tentative allies are assumed to be examining the feasibility of cutting production by at least 10 million bpd at this week’s discussion; an emergency meeting was held via video conference on Monday as a preamble for more formal talks. Basket prices have fallen to roughly $23.00 bbl (WTI is around $26.50) but that’s just a benchmark. Some oil is simply being offloaded at a negative cost now that storage has become a legitimate problem.

“We estimated that global storage availability is somewhere between 1.2 to 1.3 billion barrels. We think most of the storage is full, exceptions here and there. Sometimes it’s not physically full but maybe the oil is on its way,” Dunand said. “We think refinery runs are down 15 million a day conservatively. Empirically, demand should be down 20 million barrels or more.”

According to Bloomberg, COVID-19 is estimated to have reduced global oil demand by as much as 35 million barrels a day. Unfortunately, truly reliable estimates are difficult to come by, making oil producers’ job of predicting demand through the rest of the year that much more difficult. If the health crisis subsides or nations opt to abandon lockdowns in favor of restarting their economies, demand will fluctuate dramatically. However, this has to be predicted months in advance to account for lagging supply chains. There’s no way of knowing how each country will respond to the pandemic.

Just getting these countries to cooperate will be a hurdle in itself. The United States isn’t exactly on wonderful terms with OPEC; meanwhile, Saudi Arabia and Russia are assumed to have wildly differing estimations as to what constitutes “reduced production.”

From Bloomberg:

In talks so far, Russia has favored using an average of the first quarter output as the baseline from which to cut production, while Saudi Arabia wants to use its current April production, according to people familiar with the discussions. The difference is huge: the kingdom pumped 9.8 million barrels a day on average between January and March. In April — as it unleashed a shock and awe price war against its former ally — it’s been pumping more than 12 million barrels a day.

Given the severity of the breakdown in Saudi-Russia relations after the failure of OPEC+ talks in March, getting all sides back to the table constitutes an achievement in itself. It has required a whirl of international diplomacy to overcome the mutual recriminations over who’s to blame for the industry’s crisis.

OPEC’s big meeting takes place on April 9th (digitally, of course) and will reveal whether Russia and Saudi Arabia can bury the hatchet and avoid further economic conflict. On the following day, G20 energy advisors will discuss how they intend to respond. We’ll be sure to keep you updated. In the meantime, enjoy those insanely low gas prices now that you have nowhere to drive.

[Image: Maksim Safaniuk/Shutterstock]

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21 Comments on “Global Oil Producers to Hold Emergency Meetings This Week...”

  • avatar

    “Won’t somebody PLEASE think of the children^H^H^H^H^H^H^H^Hoil industry?!!?”

  • avatar

    US will be happy to buy cheap imported oil and keep domestic oil in reserve for future needs or when oil prices go through the roof.

    • 0 avatar

      Actually, no. The West Texas producers have a $7-$8/bbl cost of production at the wellhead, and can survive at the current $22-$24 price. Frackers in North Dakota might cut back a bit. Incidentally, in 1970, when American production controlled the price of oil, crude was $3.29/bbl. That’s $22.51 adjusted for inflation. The current price is $23.46. Suddenly, it’s 1970!

  • avatar

    The US and Canadian shale industries cannot survive in these low prices. I recall reading that even if the Saudi’s keep oil low for a long time to drive Shale producers under, there is no going back to expensive oil in the long term. As prices creep up, so will shale production. There may be a 6 month to one year lag to ramp up production, but shale has been the great equalizer basically destroying OPEC’s monopoly on market price.

    It warms my heart a little to think that the Saudis, Russians, etc cannot fund their countries with oil revenues indefinitely. Shale production has its own problems, environmental concerns being high among them, but I personally feel that the trade-off where the western world does’t have a Saudi/OPEC/Russian knife to its throat is probably worth it until electrification can take a more widespread hold on transportation and other industries.

    • 0 avatar

      I believe (could be wrong, of course) that OPEC’s share of the global market had considerably eroded (and with it the ability to influence prices) before the rise of US shale oil production, but shale has certainly had significant impact.

      It is certainly in the interest of both Saudi Arabia and Russia to come to a deal on production cuts, but that does not guarantee they will. Stability in the world oil market will benefit the the global economy, so we should hope that they do.

  • avatar

    “President trump announced that he expected Russia and Saudi Arabia to cut production by up to 15 million barrels a day.” The economic and political considerations which are going to determine this issue are far above his very limited intellectual resources to understand. His primary concerns will be attempting to reconcile his own competing interests: his obligations to Putin for past favors and his need for OPEC countries to financially prop-up his deteriorating business interests. He cannot alienate either side and will play not substantive role in resolving this matter.

    • 0 avatar

      You are a riot. Still sucking that Putin schlong aren’t ya?

      • 0 avatar

        You know Trump did, that’s one thing we can all agree on at least.

        • 0 avatar

          I’ve learned that those who build these comments about Trump have actually done everything they accuse him of doing.

          Did you find Putin to taste great or was he less filling?

          • 0 avatar

            Just to point out the obvious….how could you have possibly “learned” that? Is that like on the job training kind of stuff, cuz I really don’t see how one comes across that kind of info to make such a statement without personal experience.

            That’s sort of like you saying “I eat pieces of $*#t like you for breakfast”, to which someone replies, “you eat pieces of $*#t?” And then you are left there wondering why you dont think before you speak.

      • 0 avatar

        Hummer (masters in the STEM field):

        Why don’t you get a job instead of spending all your time on this site? Or are you studying for another “masters”?

        • 0 avatar

          I have a job, fortunately when you get to where I am I can make my own schedule, working from home the majority of the time between plant visits means I have plenty of free time. I doubt you are capable of getting to that place in a company so just keep working your bar tending job, you’ll get somewhere someday!

    • 0 avatar

      Zip is so spot on. Russian influenced the election to a HUGE degree. ($75,000 in Facebook ads and the like) (Ads that read like, “the pope endorses Trump.”)
      (Isnt this really the kind of facebook sheet that people with a 3 digit IQ can spot a mile away.)

      I cant figure why Bloomberg couldnt get relevant in the Dem Primary ALTHOUGH HE SPENT $750,000,000.


      • 0 avatar

        Road Apple:

        Obviously you are constrained to believe your Great Guide over the consensus of the intelligence agencies. What have these agencies done for you in contrast to what trump has: expanding your already prodigious intellect and enhancing your considerable masculinity?

    • 0 avatar

      Zipster, can we keep that idiocy outside of forum?

  • avatar
    Jeff S

    It will be less about the President and more about the multinational oil corporations that will have any influence on OPEC. Big oil has global interests.

  • avatar

    Part of the solution is to refine only domestic crude. Since we are a net positive producer of our energy (usage compared to production source) we should ban importation of all crude and refine domestic sources. This would allow for the domestic industry to bring their revenue to profit levels and we would remain energy self sufficient and not subject to global spats elsewhere. Trump’s decision to buy oil while its is so low to fill up the strategic oil reserves was brilliant. This would just be a cushion for the future but finalizes the policy needs for which it was designed.

    Obviously since our oil industry cannot be allowed to fail (national security implications), we need to stabilize the oil price market here and ensure that domestic producers can survive. Lots of jobs and tax revenues at stake here.

    As for the rest of the world, you deal with Russia and the Saudis. I’m sure China will love to have that oil.

    • 0 avatar

      Oil is a global market. So long as the US is an oil exporter, it will sell at world prices and that will drive US prices to prevailing global levels.

      For the US to isolate itself from the global market for oil, it would have to ban both experts and imports and impose price controls (i.e., minimum price levels). I can’t see that happening, especially in an election year.

  • avatar
    schmitt trigger

    One thing that you can reliably count on, is that in times of dropping oil markets, the OPEC members won’t agree on how to spread the pain evenly.

    Even if they agree in principle at OPEC headquarters, once that the oil ministers touch down at their respective countries, they will immediately attempt to undercut the other members.

    More so in the poorest countries like Venezuela or Nigeria, which desperately require hard currency for absolutely everything.

    There is no honor among thieves.

  • avatar

    One . . . and only one.
    The Buick Enclave
    Ten times the style of any ToyoLex
    Made in the USA
    The only vehicle that I would give up ten of my cars to have, especially the 2015 era with the in-dash blue ambient lighting.

  • avatar
    Jeff S

    It sounds ideal to only refine the oil we produce but Big Oil is global. I myself would be more than happy to see the US not import oil but that is not going to happen.

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