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Oil industry is likely to go through long period of consolidation

Oil&Gas Materials 12 March 2020 13:02 (UTC +04:00)

BAKU, Azerbaijan, March 12

By Leman Zeynalova – Trend:

Oil industry is likely to go through a long period of consolidation, Dr. Gal Luft, co-director of the Institute for the Analysis of Global Security (IAGS) told Trend.

He was commenting on the recent failure of OPEC+ to reach an agreement and the subsequent drop in oil prices, which were already weakening in the wake of coronavirus outbreak.

“Saudi and Russia are playing a dangerous game of chicken. Both exhibit nihilistic attitude. The Saudis hope that their production ramp up will cause such near term economic pain that Moscow would be forced to return to the negotiating table, and this would reverse the production surge and both sides would agree to start cutting output. But Russia plays a different game. For the Kremlin the current slump in oil prices as an opportunity to deliver a crippling blow to the US shale industry and Russia is willing to take some pain to achieve this goal,” said the expert.

Luft believes that this battle of titans could leave prices low for a long period.

“As long as COVID19 is out of control demand will remain sluggish and prices could fall to as low as $20 a barrel in the next few weeks. The key question is how widespread the disease will be in North America. Should the world’s top consumer gets infected in a bad way America will gradually shut down and oil demand will hit rock bottom,” he added.

How the industry survives the bloodbath is yet to be seen, according to Luft.

“The industry is likely to go through a long period of consolidation in which the weak and heavily indebted will be weeded out while the strong will be able to survive the storm and even pick up good opportunities for the future. But one could not discount the possibility that the corona crisis will be followed by a deep global recession caused by a string of political and financial crises. And this means prices could stay low for a very long time with devastating impact on both Russia and OPEC.”

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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Follow the author on Twitter: @Lyaman_Zeyn

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