BAKU, Azerbaijan, March 11
By Leman Zeynalova – Trend:
The current situation with lower oil prices can last be the end of this year and may start recovering only into 2021, Charles Ellinas, CEO of Cyprus-based energy consultancy e-CNHC told Trend.
He was commenting on the recent failure of OPEC+ to reach an agreement to balance the market and its immediate bearish effect on oil prices.
Ellinas noted that the new deal is not expected immediately and not before the next OPEC+ scheduled meeting in June. “But I suspect it will take longer, until low prices bring down US shale oil production substantially.”
The expert pointed out that Russia, and perhaps Saudi Arabia, sensed an opportunity to put the already highly indebted US shale industry under distress and force bankruptcies and a reduction in shale oil production.
“This is because, so far, every time OPEC+ agreed to oil production cuts, US shale oil stepped-in to cover demand, undermining and negating OPEC+ actions to shore up the oil price. Russia believes that the cuts, in effect, subsidise the US shale industry,” he said.
Ellinas noted that if this price war lasts long enough, which is very likely, it will inflict pain on US shale oil producers, whose average break-even oil price is in the range $45-50/b.
“But they have an even bigger challenge. The shale industry is highly indebted, with a high risk of quite a few of the smaller companies going bankrupt because they will not be able to service their debt if the oil price remains low for a sustained period. And that’s exactly what Russia and Saudi Arabia are aiming for,” he added.
He believes it is possible that the oil prices will remain low, especially if Saudi Aramco increases production to the maximum possible.
“Rosneft will probably do the same. In the meanwhile the spreading of coronavirus globally is also having a strong impact on oil demand. With this down and supply up, oil prices can go quite low indeed,” said Ellinas. “Combined with the impact of coronavirus, which is bringing global oil demand down, this could last to the end of the year. Recovery may well be into 2021.”
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.
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