Economy How Saudi Arabia Can Save the Global Oil Industry

How Saudi Arabia Can Save the Global Oil Industry

-

(Bloomberg Opinion) – The global oil industry is on its knees. Without measures by producers to reduce supply, the situation will deteriorate significantly as the world has run out of places to store crude oil pumped from the ground that nobody wants. A major cut in production could delay this break, perhaps until demand picks up again. But it won’t happen unless everyone plays their part.

The oil market shook somewhat due to President Donald Trump’s Thursday tweet that Saudi Arabia and Russia had agreed to cut production. However, later comments from Riyadh and Moscow clearly show that no one had promised such cuts. neither 15 million barrels nor 10 million barrels nor anything. In fact, the leaders of Russia and Saudi Arabia hadn’t even spoken to each other. Perhaps Trump has just lined up his ducks – a fictitious promise of cuts that would not occur, which would give him an excuse to revive his role as a tariff man and to impose tariffs on their oil imports into the U.S.

But it’s clear that something has changed, even if it’s only in tone. Saudi Arabia is now bravely striving for a global agreement to reduce oil production, not only through the organization for oil-exporting countries, but also only with the expanded OPEC + coalition, which also includes Russia. This was done by calling for an “urgent meeting” aimed at “reaching a fair agreement to restore the desired oil market balance” between the OPEC + group “and other countries”.

The last bit is crucial. The kingdom led by Crown Prince Mohammed bin Salman painfully makes it clear that the victim must be shared, otherwise Saudi Arabia will not take part in it at all. There can be no free riders.

It is a tactic that the country has previously used, and the current plunge in oil prices shows that it is true to its word. The kingdom was the driving force behind the cuts proposed at the March meeting of OPEC + oil ministers. But back then, as it is said today, it would only do it if others also took part. The only thing that has changed in the past month is that the “others” have now become an even larger group that has to involve all of the world’s major oil producers.

Here’s what Saudi Arabia needs to do.

At the virtual meeting of oil producers, which is now being postponed from Monday to Thursday, his colleagues – including those who don’t show up – should be given a clear binary choice and a definite ultimatum. Either they agree to strict, enforced, and observable production restrictions for everyone, and Saudi Arabia will join in by reducing its own production to, say, 8.5 million barrels a day (I pulled that number out of the air). Or Saudi Arabia should make it clear that it will continue to pump 12.3 million barrels a day, which would cause prices to drop to single digits to force oil out of the market.

The kingdom could even go so far as to include a list of all the countries it would take to participate. The table above shows who some of the required participants might be. In addition to the United States and the OPEC + countries, this includes Canada, China, Brazil, Qatar, Norway and the United Kingdom, each of which pumps over 1 million barrels a day.

Sure, there are obstacles to overcome. Some on this list may be more willing to participate than others. But the alternative will do much more harm to the oil industry in the countries on this list than Saudi Arabia. And such a drop in prices can happen anyway if the cut is not large enough or is delayed.

I know that many people argue that Saudi Arabia needs higher oil prices than shale producers to fund its budget. But I’ve never been a big fan of using balanced household prices to determine the relative pain oil producers would suffer. The budgets partly reflect price expectations. For example, if you expect an oil price of $ 60 a barrel, create a budget based on the corresponding income level. If that price is not reached, you can cut spending, reserve, or borrow – all options that Saudi Arabia continues to have.

However, the kingdom will face the same storage problem as everyone else. It should not go unnoticed that Saudi Arabia has announced it will increase exports to 10.6 million barrels a day in May, as its own refineries did not want as much crude oil due to the drop in demand. Refineries elsewhere may not want it either. Saudi Arabia is likely to need to rebuild its own inventory, which it has reduced in the past four years, but it has more than twice the space for it than is available in the U.S. Strategic Petroleum Reserve.

Finally, Saudi Arabia should make it clear that this is a short-term solution to an exceptional situation. It must avoid the temptation to include a deal in a long-term supply management initiative. Anything that smells of an OPEC + extension will not fly with the United States or others. This is not OPEC ++. It must be a temporary, one-time solution to the extreme situation that the global oil industry faces because the world is locked to fight the Covid 19 virus. As soon as things recover – as they become – things will continue as usual and bring the market shares back up to date.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Julian Lee is an oil strategist at Bloomberg. Previously, he was a senior analyst at the Center for Global Energy Studies.

You can find more articles like this at bloomberg.com/opinion

Subscribe now to stay up to date with the most trusted business news source.

© 2020 Bloomberg L.P.

LEAVE A REPLY

Please enter your comment!
Please enter your name here

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Latest news

Football – Premier League in the final straight

The date and place remain to be fixed pending a green light from the authorities, but the principle of...

Space – Bad weather threatens SpaceX manned flight

Rain and thunderstorms could force the postponement of the takeoff of two NASA astronauts thanks to SpaceX.Updated 28 minutes...

PLK and Leto featuring on Train de vie, the clip unveiled

We are spoiled French rap level this week! It all started on Sunday with Moha La Squale who resumes...

Must read

You might also likeRELATED
Recommended to you