The current optimism of analysts and the media that an end to the ongoing oil price spade of OPEC + is near is completely unjustified. The ongoing volatility of the oil market, the struggle between leading producers for market share, the logistical impossibility to implement US production cuts, and the continued destruction of demand by COVID-19 are not problems that can be solved by an OPEC meeting. Immediately after Trump’s recent OPEC Twitter offensive, Saudi Arabia and Russia were critical of the U.S. President’s impact and influence on the matter. While Putin and Mohammed bin Salman refuse to beat Trump, the real power in the oil market is not with the US President. Trump’s tweet, which claims that MBS and Putin would agree to a production cut of more than 10 million bpd, shows not only his overestimation of his own power over the two countries, but also a lack of knowledge of the underlying market fundamentals and the current demand destruction worldwide.
As former US President George W. Bush noted during his campaign, which we know didn’t end well, “it is ultimately the stupid economy that counts.” Trump’s tweets and his general approach to the matter suggest that he and his administration are out of touch with reality. Even if a Saudi-Russian combination saved 10 million bpd, the oil price reaction would be minimal and very short-lived. Leading oil market experts such as Vitol, Trafigura and Goldman Sachs are currently warning of a destruction of total demand of 20 million bpd or more. If we look at the cuts in global refinery runs, we’ve already hit -17 million bpd or more. Downstream companies reduce their overall production as demand from industry and consumers worldwide collapses. Locks in more than half of the world have a significant impact and affect demand for oil, gas and other types of energy. Reducing production by more than 10 million bpd is not a real solution and could even cause markets to react negatively. If the cut in production doesn’t push oil prices higher, market anxiety could hit historic highs and cause oil prices to drop below $ 10 a barrel in the coming weeks.
<p class = "Artboard-Atom Artboard-Text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Related: $ 1 Oil: Saudi Arabia’s attempt to crush US shale“data-reactid =” 14 “>Related: $ 1 Oil: Saudi Arabia’s attempt to crush US shale
The upcoming meeting of “OPEC + and Friends” will be very difficult. There is a very real possibility that the meeting will fail because the goals set are completely unclear. Saudi Arabia, probably supported by Abu Dhabi, called an emergency meeting not only from OPEC + members but from all oil producing nations. This means that, at least according to the Western media, the US is invited and likely to participate. Saudi Arabia appears to have called Trump’s bluff when invited to the US, as Washington’s participation in the meeting implicitly declared that a possible production cut deal would include the US. If you look at the upstream US oil and gas sector, you can see one thing without analysis: Washington and the US oil and gas operators are not on the same page. Suggestions that Washington might be able to control or even force US oil to cut production itself through legislation are ridiculous and would end in a huge lawsuit. Even if only Texas representatives are present, oil companies are unlikely to comply with the regulations. It is simply not in the US oil and gas DNA to work together internationally. The free market economy is a cornerstone of US society and economy.
The second major threat at Monday’s meeting is that Saudi Arabia doesn’t seem to be convinced at all that it needs to change its current tactics. The aspired goals of regaining market share, forcing Russia to come to the table and forcing non-OPEC producers like US slate to their knees are working well. Several Saudi officials have stated that they are ready to discuss a new agreement, but only on the condition that potential cuts in production will be on everyone’s shoulders, not just Saudi Arabia, Russia, and the United Arab Emirates. Against this backdrop, Trump’s call for a cut of more than 10 million bpd from Russia and Saudi Arabia is, to say the least, unrealistic.
Russia’s position has so far remained unclear. While Putin still pretends to have nothing to fear, the Russian oligarchs and the Russian leader like to discuss all the options that are on the table. For Russia, Trump’s current position is seen as an opportunity to receive some gifts from the United States very soon. Russia could consider working with the United States if Washington agrees to end Russian sanctions. For Moscow, however, this is not as important as a close relationship with Riyadh and OPEC. 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 next day, there is a fourth group that will be crucial at Monday’s meeting. To achieve a 10 million bpd cut, OPEC must convince all other oil-producing countries to make a contribution. It currently seems unrealistic to convince such a large list of independent nations to join this effort. Countries like Libya, Iran, Iraq, Brazil and Canada are unlikely to agree on a cut in production at the moment. This is another reason why the OPEC meeting on Monday is likely to fail.
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The real fear of the markets should be mood and expectation right now. After Trump’s tweet led a 10-15 million barrel drop a day, oil prices rose and everything else is considered a failure. After what is likely to be a rather quiet weekend for the energy markets, a failure on Monday with a lot of media attention is likely to frenzy the markets. This fear, coupled with the continued destruction in demand, could pose a serious problem for oil markets next week.
Against this background, the rational short-term approach of OPEC +, especially for Riyadh and Moscow, should not be to move at all. Don’t increase production, stand on the quay and watch US slate and non-OPEC VLCCs fill the oil reservoir to the brim. If OPEC + cuts without the help of other nations, it will lose future leverage and the markets can crash anyway. By doing nothing, Saudi Arabia and Russia can maintain the illusion that a cut in OPEC + production will save the markets.
By Cyril Widdershoven for Oilprice.com
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