BAKU, Azerbaijan, April 6
By Leman Zeynalova - Trend:
Even with the most optimistic assumptions the OPEC+ summit will not be in a position to balance the world oil market because the present fall in oil demand is huge with about half of the world's population confined to home, 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 expert noted that if OPEC+ was to take dramatic measures (and it is very far from a done deal), it would not add a supply shock to the demand shock, it would send a positive message to the markets and it would limit the damage.
“This would not solve totally the problems producers are facing but it would be an important contribution to the future stabilization of the oil market. There is yet some doubt about the date of this OPEC/non-OPEC meeting but it is very likely that it will take place next week,” said Perrin.
He went on to add that it is a positive step after the recent phone discussion between Presidents Donald Trump and Vladimir Putin.
“Both heads of state stressed that it is important to try to restore some stability on the oil market. The Trump Administration also sent the same message to Saudi Arabia through the Crown Prince, Mohammed Bin Salman. The U.S., Russia and Saudi Arabia are the world's largest oil producers and it is crucial to establish a productive dialogue between them. The missing link so far is a good relationship between Russia and Saudi Arabia, which was broken after Moscow's refusal to accept the OPEC's proposals in Vienna on 6 March at the latest OPEC+ summit,” noted the expert.
Perrin pointed out that dialogue is important but it is clearly not enough.
“The present health crisis and the reactions of a lot of governments to this pandemic led to a dramatic fall in oil prices. These prices were on 30 March at their lowest level since the beginning of 2002 before a significant rise in the latest days. On Friday 3 April, North Sea Brent for June contracts closed at $34.65 per barrel, up $11.9 (+52 percent) since 30 March. Since the peak of this year at the beginning of January Brent fell by about 50 percent. This fall is the result of a demand shock and of a supply shock. The most important is the demand shock since the beginning of this year and it is unprecedented. Producers must show to the markets that they are discussing between them, that they are negotiating but also that they are able to act together after the failure of the OPEC+ summit on 6 March,” said the expert.
The success of the future meeting will be based on the willingness of Russia and Saudi Arabia and their OPEC and non-OPEC partners to reduce their oil output by a very significant amount, he said.
Perrin noted that another key issue will be a possible U.S. involvement, which would be totally exceptional. The U.S. is not a member state of OPEC (13 countries) and is not one of the 10 non-OPEC countries which were negotiating with OPEC.
“Due to antitrust legislation and regulation and to the fact that its oil industry is totally held by private shareholders (there is not one national oil company in the U.S.), the U.S. government and U.S. oil companies never talk with other states and other companies about a possible reduction of their output. This is an essential point because Russia's decision to reject OPEC's proposals on 6 March was partly based on the fact that the U.S. would go on increasing its production and capturing some of Russia's and OPEC's market shares,” added the expert.
Donald Trump said that Russia and Saudi Arabia were ready to cut their production by 10 million barrels per day and, perhaps, by up to 15 million b/d. “These figures are huge and the U.S. President's statement must be studied with a pinch of salt (perhaps with a barrel of salt...). President Trump probably referred to the fact that OPEC+ (23 countries) could try to remove from the market about 10% of world oil production, which amounts to 100 million b/d or so. It would mean 10 million b/d and Russia and Saudi Arabia would have to bear a large part of the figure as they are respectively the second and third-largest oil producers. Never in its history since its birth in 1960 OPEC has considered such a huge cut. If we follow what was proposed by OPEC to the OPEC+ summit on 6 March OPEC could bear two-thirds of this cut, about 6.6 million b/d. But nothing is certain at this stage,” noted Perrin.
He pointed out that there are three key issues here: Will Russia accept a very important output cut after having refused a rather small reduction in March? Will Russia and Saudi Arabia accept to stop the oil ''war'' which began just after 6 March? And will the U.S. put something material on the table (even if the U.S. will not be officially represented at this meeting)? “Not only words but acts.”
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