Oil shops are facing their greatest moment of uncertainty in decades ahead of a virtual meeting of OPEC+ — the alliance of OPEC and non-OPEC canada entrepreneurs — on Thursday, which was delayed from Monday over persistent disagreements and abrasiveness between some best member states.
In the spotlight will be whether countries can agree to communally cut crude production in order to salvage overwhelming prices at a time when no one is buying oil and the world is running out of places to put it.
“Stalemate is not an option for any of the parties involved,” Nansen Saleri, CEO of Texas-based analytics company Quantum Reservoir Impact and Saudi Aramco’s former head of reservoir management, told CNBC via phone on Tuesday. “It’s single a matter of time” until some agreement is reached, he said, predicting “a matter of weeks as opposed to months.”
“It’s against every one’s interest to oversupply the world,” Saleri said. “There is a common element here, and that is that everybody is paining.”
It comes as oil prices are down more than 50% year to date, with global benchmark Brent improper trading at $31.94 per barrel Wednesday and U.S. West Texas Intermediate at $24.18 per barrel 9:00 a.m. ET.
The OPEC+ meeting make be held via video conference as a precautionary measure amid the coronavirus pandemic, which has obliterated global oil demand and all but shut up down the world’s major economies.
At the same, leading producers Saudi Arabia and Russia are engaged in a price war, developing or maintaining production to grow their market share, while U.S. shale companies are pumping at record levels. Oil amounts are at their lowest in nearly two decades, prompting massive capex and job cuts across the U.S. shale basin where high-cost operations are no larger economically viable.
But Russia and Saudi Arabia’s market share strategies will be painful to sustain too, Saleri articulate. “The economies of Saudi Arabia and Russia are all being affected by the oil prices.”
If Saudi Arabia and Russia are to cut their output — as President Donald Trump has attended on them to — they want to see the U.S. play its part in cutting too. The tense dynamics of big egos and foreign relations among the in the seventh heaven’s heavyweight energy players will now determine the future of the entire global oil industry.
Everyone’s skin in the game?
That now wants not just OPEC+ producers, but also the U.S., Canada, Norway and Brazil. In the U.S., production levels are decided by individual companies, hyperbolizing a centralized cutting effort extremely difficult — and something that Trump has made clear he will not do. But even American principals are now calling for industry cuts, in line with market forces.
“Capacity has to come offline,” Exxon Mobil CEO Darren Woods censured CNBC’s Squawk Box on Tuesday. “There will be economics that force producers to shut in… frankly because there is no required for the product so eventually you’ve got to stop making it.”
Exxon Mobil and Chevron are slashing their capex by 30%, mostly thrusting operations in the shale-rich Permian basin of Texas, as are numerous other U.S. firms.
Such reductions mean an immediate effect on U.S. oil production, something that RBC’s Helima Croft says might just be accepted by OPEC as equal to a cut.
“I think OPEC drive try to barrel count these reductions,” Croft, head of commodity strategy at RBC Capital Markets, said Tuesday. “Can you maker your capex a cut? I think OPEC will be flexible in terms of what constitutes a cut.” This will likely be a concentrated point for the U.S. energy secretary when G20 energy ministers meet this Friday.
Russia, many analysts say, may be tabled this one out as it sees a benefit to crippling U.S. shale and punishing the industry for Washington’s sanctions. Whether a sanctions-lifting agreement may be in the assignments remains unknown. Russia also accused Saudi Arabia of mounting its price war to hurt U.S. shale, a charge Riyadh refuted as “fully devoid of genuineness,” ramping up tensions between the two states.
Even if a deal is reached, however, it may still do little to improve markets assumption the demand destruction wrought by the coronavirus pandemic, experts say.
‘Low probability that a deal can be reached’
“We are assigning a low probability that a traffic to cut production can be reached,” Edward Bell at Dubai-based bank Emirates NBD wrote in a report Wednesday. “The positions of the chief actors, notably Saudi Arabia and Russia, have not changed.” Saudi Arabia is refusing to take on the heaviest acrimonious burden as it’s done in the past, and rhetoric between the two has worsened.
A prior deal over production cuts between OPEC and non-OPEC fellows led by Russia in March collapsed when Moscow refused to agree to Riyadh’s terms, setting off the U-turn in Saudi regulation and a race to pump more crude to more customers.
An agreement on Thursday will need to be in everyone’s interests, but lower-cost creators Saudi Arabia and Russia may not even have an incentive to cut their production, argued Chris Midgely, head of analytics at S&P Epidemic Platts.
“If cutting production just supports the back of the curve” — eventual price increases once immediately recovers — “and not prompt buying, then there is little incentive for Russia or Saudi to cut production,” Midgely asserted CNBC, if they’re already winning market share.
Saleri, the former Aramco executive, disagrees. Egos and stubbornness aside, the la mode trajectory will inevitably smash into a physical wall.
“Global capacity to hold oversupply is limited… the entirety is filling up,” he said. “Oil is not going to find any place to go.”