Page 4 - MEOG Week 10

MEOG Commentary MEOG
OPEC+ talks fail
to bring calm to
the market
After much speculation, OPEC was unable to persuade Russia to agree to a share of output cuts to respond to the present collapse in demand for oil, and challenging days lie ahead.
oPeC
What:
The much-anticipated OPEC+ meeting to consider oil production cuts failed to deliver.
Why:
Russia refused to come on board.
What next:
A period of extreme uncertainty in the oil and gas market lies ahead.
TAlkS between OPEC and Russia over whether to cut oil production in response to the coronavi- rus outbreak collapsed without a deal on Friday, sending crude prices plunging more than 9 per cent to their lowest level in three years.
Russia, which has been allied with Saudi Arabia and OPEC since 2016 to help prop up oil markets, rejected calls to curtail jointly almost 4 per cent of global crude production with new output cuts, as a sharp drop in aviation and transport demand has sent prices down by a third since January.
OPEC on Thursday recommended addi- tional production cuts of 1.5mn barrels per day (bpd) from the beginning of next month until the end of the year.
The proposal was conditional on the sup- port of non-OPEC producers, including Russia. OPEC cautioned that the deal could only be applied on a pro-rata basis, with core members set to cut 1mn bpd and non-OPEC partners expected to cut 500,000 bpd.
On the news of the failure of the talks interna- tional benchmark Brent crude settled at $45.46 on Friday afternoon, down over 8%, while US West Texas Intermediate sank to $41.93, also around 8% lower. Both benchmarks were trad- ing at lows not seen since 2017.
The failure to reach an agreement will be felt widely across the world, from commodity-de- pendent countries such as Angola and Oman to energy giants like ExxonMobil and Royal Dutch Shell.
It will make life more complicated for compa- nies like BP that are trying to reinvent themselves as greener producers. Cheap oil will compete against renewable energy, potentially putting a drag on the rise of electric vehicle (EV) compa- nies such as Tesla.
It will also undermine the alliance between Saudi Arabia and Russia, which had boosted Moscow’s influence in the Middle East.
The fate of the meeting was sealed when Saudi Arabia and other members OPEC threw
down a gauntlet on Thursday, proposing an additional 1.5mn bpd production cut for the rest of this year -- but only if Russia would join. Moscow, which had been arguing for less drastic action, held firm.
The meeting exposed a fundamental disa- greement between the two countries, previously so close that their relationship was recently described as a marriage.
Seeing it as a body blow to the US shale indus- try, which has benefited from most of recent global oil demand growth, Moscow was content that the coronavirus-induced drop in demand would push prices lower. Riyadh, whose econ- omy is less adaptable to low prices, disagreed.
Russian Energy Minister Alexander Novak said there would be no production restraints on members of the so-called OPEC+ group once its existing output deal expires at the end of this month.
At the end of the meeting hopes were expressed that there was still be time for recon- ciliation and OPEC nations highlighted that the door was open to further talks. This appeared to be wishful thinking.
Saudi Arabia’s oil minister, Prince Abdulaziz bin Salman, the half-brother of Mohammed bin Salman (MbS), the kingdom’s de facto ruler, said after the meeting the kingdom would keep the market “wondering” whether it would now raise production.(This was soon made clear – see next story)
But neither OPEC members nor Russia are immune to lower prices, and analysts initially expressed doubts the kingdom will want prices to fall much lower.
“The market is now facing the spectre of unrestrained production,” said Ann-louise Hit- tle at Wood Mackenzie. “However, we do not think Saudi Arabia will push hard to lift their output.” Traders said they would be watching Saudi Arabia’s exports and output closely in the coming weeks. One OPEC delegate said collab- oration between Saudi Arabia and Russia was
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w w w . N E W S B A S E . c o m Week 10 11•March•2020