Global Oil Producers to Hold Emergency Meetings This Week

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]