Factors that led to ‘no deal’ by OPEC+

Oil&Gas Materials 11 March 2020 14:00 (UTC +04:00)
Factors that led to ‘no deal’ by OPEC+

BAKU, Azerbaijan, March 11

By Leman Zeynalova - Trend:

The failure of OPEC+ to reach an agreement due to Russia's refusal to accept the OPEC's proposal and Saudi Arabia's decision to slash the official export prices of its crudes in April led to a free fall of oil prices, which were already on a downwards trend with the growing impact of the coronavirus on the world economy and on the world oil market, Francis Perrin, Senior Fellow at the Policy Center for the New South (PCNS, Rabat) and at the French Institute for International and Strategic Affairs (IRIS, Paris) told Trend.

“The price of North Sea Brent is now only $37 per barrel. It fell by 45 percent since the peak for this year at the beginning of January with the strong tensions between the US and Iran in the Middle East. Since the terrible day of 9 March, with a fall in oil prices of more than 20 percent, there has been some consolidation on this front but the worst scenario for oil producers (an oil price falling to about $20 per barrel) is not impossible,” said the expert.

Perrin noted that OPEC's proposal was to extend the previous production cuts decided by OPEC+ until the end of 2020 and to add further cuts of 1.5 million barrels per day (of which 1 million barrels per day for OPEC) until the end of the first half of 2020.

“It was an ambitious but realistic proposal in the current economic and energy context. The best scenario would be for these OPEC and non-OPEC countries to go back rapidly to the negotiating table to send a positive message to the oil markets but the first step would be for Russia and Saudi Arabia, the largest oil producers behind the U.S., to talk again and to try to reach an agreement between them. Russia did not rule out this possibility but it is clearly not a done deal and it is possible that this rapprochement would require a price war which would be devastating for oil producers and exporters,” he said.

The expert went on to add that Russia's decision to refuse the oil cuts proposed by OPEC was based on the following factors: there is a strong reluctance within the Russian oil industry about further oil cuts; Russia thinks that previous production reductions were not very successful; this country recognizes that the coronavirus has a strong bearish impact but stresses that this is a short-term impact; it needs an oil price of only $42 per barrel to balance its budget, according to the IMF's calculations; and it is not very satisfied to see OPEC+ reducing once more its production when the U.S. is increasing its oil output and exports.

“What is clear is that at the current price levels, every oil producer will suffer and this includes the U.S., Russia and Saudi Arabia. 2020 could be a very difficult year for the U.S. oil industry with a lot of bankruptcies among its ranks. As the U.S. is producing mostly unconventional crudes and as many U.S. oil companies are heavily indebted the consequences of a period of very low oil prices could be devastating. This country's oil production is on a rising trend since 2008 but it fell in 2016 due to very low oil prices, which were at the time partly the consequence of a price war between OPEC and non-OPEC countries. Sometimes history is repeating itself (with some differences as always),” said the expert.

Perrin noted that oil prices fell by about 75 percent between the summer of 2014 and January 2016.

“This crash of oil prices pushed OPEC and non-OPEC countries to negotiate in 2016 and the result of these talks were a cooperation among them between November-December 2016 and the beginning of March 2020. We will see very soon if oil producers have learnt the lessons of recent history or if some of them are ready for an oil price war, which would be detrimental to all of them. This is a time for wise political decisions and not for a battle of egos, especially between Russia and Saudi Arabia. We are now living testing times for the oil producers and exporters and for the oil industry worldwide.”


Follow the author on Twitter: @Lyaman_Zeyn