BAKU, Azerbaijan, March 10
By Leman Zeynalova – Trend:
The costs of oversupply caused by OPEC+ failure for both parties Russia and OPEC members is too high to go through with it, Cyril Widdershoven, a Middle East geopolitical specialist and energy analyst, a partner at Dutch risk consultancy VEROCY and Global Head Strategy Risk at Berry Commodities told Trend.
In view of the current fundamentals and the consensus on market perspectives, the 178th (Extraordinary) Meeting of the Conference of the Organization of the Petroleum Exporting Countries (OPEC), held in Vienna, Austria, on 5 March 2020, decided to recommend to the 8th OPEC and non-OPEC Ministerial Meeting to extend the adjustment levels agreed at the 177th Meeting of the Conference and the 7th OPEC and non-OPEC Ministerial Meeting for the remainder of the year. It also agreed to recommend to the 8th OPEC and non-OPEC Ministerial Meeting a further adjustment of 1.5 mb/d until 30 June 2020 to be applied pro-rata between OPEC (1.0 mb/d) and non-OPEC producing countries (0.5 mb/d) participating in the Declaration of Cooperation.
However, during the meeting held March 6, OPEC+ failed to reach any agreement on extension of the deal or deepening the cuts further, which led to a significant decline in oil prices.
Both are currently taking the aggressive approach, maybe it is bluff poker, but with a full out production increase (at least of countries able to), the costs for all will be high, the expert believes.
“The other issue is that overproduction at present will have an effect on total market in 2020, as the current overproduction and buys by importers of low price oil will be put in storage, to be used after, so demand for oil in H2 2020 will be lower than expected,” said Widdershoven.
There are several reasons able to put forward, added the expert.
“Russia wanted to show OPEC that for cooperation it needs to listen to Moscow. At present, the OPEC approach was too one-sided, presenting plans without already having Moscow onboard. Russia and Saudi Arabia want to get rid or hit very hard US shale oil. The latter is already in a crisis, even that production is still high, but this is mainly due to hedging of production and need for cash to pay the debt payments being asked by financial institutions and banks,” he said.
Widdershoven pointed out that Russia and OPEC want market share back, so lowering the price (traditional approach) will squeeze the others.
“It also will put immense pressure on all offshore oil and gas projects in place or planned. Too low price settings for most production worldwide. However, a price war always causes harm to all,” he said. “ Their position is hard, even that for 2020 no real issues will be there as most of the production is still hedged, so prices are not having an effect. However, for after 2020 the position of them will be very bleak, especially if not only the oil price war is taking casualties but also the coronavirus issue.”
He said current market reactions already show that nobody wants this level of price.
“In theory, looking at markets, the low price setting will be there for total 2020 if no sudden relieve to coronavirus and other threats is found.”
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