The current optimism of analysts and the media that the end of the OPEC + oil price boom is near is completely unjustified. The current volatility of the oil market, the battle between the main producers for market share, the logistical impossibility of imposing production reductions in the United States and the continued destruction of demand caused by COVID-19 are not issues that can be resolved by an OPEC meeting. Immediately after OPEC’s latest Twitter offensive on Twitter, Saudi Arabia and Russia issued critical statements on the impact and influence of the President on the issue. While Putin and Mohammed bin Salman are reluctant to disparage Trump, the real power in the oil market does not belong to the President. Trump’s tweet that MBS and Putin would accept a production cut of more than 10 million bpd not only shows his overestimation of his own power in both countries, but also shows a lack of knowledge of market fundamentals underlying and the current destruction of global demand.
As former US President George W. Bush said during his election campaign, which did not end well as we know, “it is the stupid economy” that ultimately counts. Trump’s tweets and general approach to the matter suggest that he and his administration are out of touch with reality. Even if a Saudi-Russian combination reduced 10 million barrels a day, the reaction in oil prices would be minimal and very short-lived. Currently, leading oil market experts such as Vitol, Trafigura and Goldman Sachs are announcing total demand destruction of 20 million bpd or more. When we look at reductions in volumes from global refineries, we have already reached levels of -17 million bpd or more. Downstream companies are cutting production as demand from industry and consumers around the world collapses. Lockouts in more than half of the world have a major impact, affecting demand for oil, gas and other types of energy. Reducing more than 10 million b / d of production is not a real solution and it could even lead to a negative reaction from the markets. When production declines do not drive up oil prices, fear in the market could reach historic highs, causing oil prices to drop to levels below $ 10 a barrel in the coming weeks.
Related: $ 1 oil: Saudi Arabia’s attempt to crush American shale The next “OPEC + and friends” meeting will be very delicate. There is a very real possibility that the meeting could fail because the objectives that have been set are absolutely unclear. Saudi Arabia, probably backed by Abu Dhabi, has called an emergency meeting, not only of OPEC + members but of all oil-producing countries. This means that, at least according to Western media, the United States is invited and will likely attend. By inviting the United States, it appears that Saudi Arabia has called Trump the bluff because by attending the meeting, Washington will implicitly declare that a possible production reduction agreement would include the United States. When you look at the American oil and gas sector upstream, there is one thing that can be said without any analysis… The oil and gas operators in Washington and the United States are not on the same length of time. wave. The suggestions that Washington could control or even force US oil to cut production, even through legislation, are ridiculous and would end in a gigantic legal battle. Even if only Texas officials attend, it is unlikely that the oil companies will comply, it is simply not in the United States’ oil and gas DNA to work together internationally. The market economy is a cornerstone of American society and business.
The second major threat to Monday’s meeting is that Saudi Arabia does not seem at all convinced that it needs to change its current tactics. Its targeted goals of reclaiming market share, forcing Russia to sit at the table and bringing non-OPEC producers such as the American shale to their knees are working well. Several Saudi officials have said they are ready to discuss a new deal, but only under conditions where potential production cuts will be on everyone’s shoulders, not just Saudi Arabia, Russia and United Arab Emirates. With this in mind, Trump’s demand for a reduction of more than 10 million barrels a day from Russia and Saudi Arabia is unrealistic to say the least.
So far, Russia’s position is unclear. While Putin still acts as if he had nothing to fear, the Russian oligarchs and the Russian leader are happy to debate the options that are on the table. For Russia, the current position taken by Trump is seen as an opportunity to get gifts from the United States very soon. Russia may consider cooperation with the United States if Washington agrees to end the Russian sanctions. But that is not as important to Moscow as a solid relationship with Riyadh and OPEC in the future. Future opportunities with Saudi Arabia are more attractive to Putin than a positive relationship with a president who may not be re-elected this year.
While all eyes will be on Washington, Riyadh and Moscow the day ahead, there is a fourth group that will be vital at Monday’s meeting. To reach a drop of 10 million barrels a day, OPEC will have to convince all the other oil-producing countries to contribute. At present, convincing such a large list of independent nations to join these efforts seems unrealistic. Countries like Libya, Iran, Iraq, Brazil and Canada are unlikely to agree to cut production at this time. This is yet another reason why the OPEC meeting will likely fail on Monday.
Related: Oilman’s Plea to President Trump
The real fear for the markets right now should be the feeling and the expectation. After Trump’s tweet cited a reduction of 10 to 15 million barrels a day, oil prices have soared and nothing less than that will be considered a failure. After what looks like a fairly quiet weekend for the energy markets, a failure on Monday with a lot of media attention is likely to drive the markets to frenzy. This fear, combined with continued destruction of demand, could pose a serious problem for the oil markets next week.
With this in mind, OPEC +’s rational short-term approach should be, especially for Riyadh and Moscow, to stay put. Don’t increase production, get on the wharf and watch the American shale and the non-OPEC VLCCs fill the oil storage to the brim. If OPEC + deletes without the help of other countries, it will lose its future leverage and markets could collapse anyway. By doing nothing, Saudi Arabia and Russia can maintain the illusion that a reduction in OPEC + production would save the markets.
By Cyril Widdershoven for Oilprice.com
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