BAKU, Azerbaijan, April 6
By Leman Zeynalova - Trend:
The likelihood that an OPEC+ agreement can be brokered is low, according to Fitch Solutions Country Risk and Industry Research (a unit of Fitch Group).
“The fiscal cost to both Saudi Arabia and Russia is extremely high and, in our view, it would have been in the interests of both parties to find a compromise early on. However, both have become entrenched in their positions with little scope for compromise. Given both have adequate fiscal buffers in place to survive a multi-year price slump, we expect both will continue to pursue a strategy of maximizing market share, forcing oil prices down to shut-in levels and clearing the market of higher cost producers,” Trend reports citing the company.
There have been proposals for a coordinated cut by US producers.
“We believe that were the US to commit to such a cut, Saudi Arabia and Russia would likely come on board. Russia had objected to additional cutbacks due to the effective subsidy they provided to US shale producers. Were the US to be brought board, Moscow could likely claim a strategic win. Saudi Arabia, meanwhile, in rejection of its increasingly overweight in the OPEC+ supply cuts, has laid blame for the current market rout squarely at Russia’s door. Securing agreement on new cuts could also be viewed as a win for the kingdom,” Fitch Solutions said in its report.
However, the prospects for coordinated US action are relatively poor, according to the company.
“It is questionable how feasible it would be to implement and enforce a cut, not least due to the myriad of players active in the shale patch. More importantly, support for such a cut is currently lacking among both state regulators and producers. Some have signaled interest in coordinated action, but these remain in the minority. That said, we are in truly exceptional times and continued price collapse could, perhaps, induce more producers to submit to a cut.”
President Trump has voiced support for the sector and indicated a desire to protect its producers.
“ However, any support given will likely be extremely limited. The only concrete proposal made by the administration to date has been the plan to purchase 77mn bbl of crude for the country’s Strategic Petroleum Reserve. This has so far failed to receive congressional support and was removed from the recently announced USD2trn stimulus package. While crude purchases could be included in future packages, they would do little to offset demand losses elsewhere. The SPR reports to capacity to receive up to 685,000b/d of crude. As point of comparison, we are forecasting around a 1.5mn b/d annual average drop in US fuels demand. The bulk of this demand will be lost over Q2, when we expect consumption to fall by around 4.0mn b/d y-o-y. Other measures have also been proposed, including the extension of low interest loans and loan guarantees to shale producers, production caps, crude import tariffs and quotas and antidumping and countervailing duties.”
The shale sector will be among those worst-impacted, as was the case following the 2014 price collapse, the company believes.
“In light of the limited support that the government can give, it is the trajectory of oil prices that will determine trends in production. Producers are responding rapidly, making immediate and aggressive cuts to spending. However, given a sharp drop in revenue, limited access to new capital and (for some) low cash buffers in place a steep rise in bankruptcies is all but inevitable.”
Production will fall both more rapidly and more aggressively than during the previous downturn and the sector that emerges will be more consolidated, spurred by opportunistic M&A by majors and large indies, reads the report.
“The cost base will be sustainably lower and the sector generally more resilient to future downturns. However, the pace of growth will also be substantially slower than before. This is not only the result of the current actions by Saudi Arabia and Russia – the trend towards slower growth was already in play in 2019, as companies shifted strategy from volume growth to value creation. However, the current price collapse and further damage to investor sentiment have undoubtedly provided a catalyst to the trend.”
---
Follow the author on Twitter: @Lyaman_Zeyn