Page 10 - DMEA Week 15 2020

DMEA COMMENTARY DMEA
state’s energy regulator. The Republican politi- cian urged the US on April 8 to cut at least 4mn bpd of supply within the next three months to avoid storage running out.
Texas accounts for more than 40% of US national oil production. While antitrust laws prevent US producers from co-ordinating sup- ply, the state could in theory legislate to cap out- put. Even so, this would leave authorities at risk of being sued by operators claiming losses as a result of the restrictions.
The US would also have to impose a cut unilaterally rather than through an explicit agreement with other producers, to ward off accusations of collusion. Such anti-competi- tive activity is banned by the Organisation for Economic Co-operation and Development (OECD), of which the US is a member.
Norway, another OECD member, has in a similar vein said it would consider a unilateral cut to production if OPEC+’s deal comes into force. The country, which lifted 1.75mn bpd of crude in February, was among seven to attend
the group’s talks last week as an observer. The others were Argentina, Colombia, Ecuador, Egypt, Indonesia and Trinidad & Tobago.
What next?
Unilateral cuts would, of course, help tighten the market. But as non-OPEC+ countries will not be party to a formal agreement committing them to quotas, they will be able to ramp production back up when it suits them. This is likely to sow distrust among OPEC+ members, especially those pledging the biggest reductions: Saudi Arabia and Russia.
A chief cause behind the collapse of OPEC+’s previous production pact in early March was growing frustration among the group that other producers were profiting from their actions by raising their own supply. Those same anxieties could re-emerge and derail the pact, plunging the industry once more into chaos. Either the deal could fall through, or OPEC+ members could simply flout their commitments. ™
MACRO
Oil plunges again after IEA paints bleak picture
GLOBAL
Demand will fall 29mn bpd year on year this month, the IEA says.
BRENT sank back below $30 per barrel this week, despite OPEC+ finalising a deal on his- toric cuts, amid expectations that demand will plunge to a 25-year low this month.
The International Energy Agency (IEA) painted a bleak picture of the market’s outlook in its monthly report published on April 15. The agreement between OPEC and its allies to take 9.7mn barrels per day off the market in May and June represents a “solid start,” the IEA said, but demand is slated to plummet 29mn bpd year on year this month alone, and 26mn bpd in May. The recovery will start to gain traction in June, but demand will still be 15mn bpd below the level a year earlier. Full-year demand will drop by 9.3mn bpd, the IEA warned.
“By lowering the peak of the supply overhand and flattening the curve of the build-up stocks, they help a complex system absorb the worst of this crisis,” the agency said. “There is no feasible agreement that could cut supply by enough to offset such near-term demand losses. However, the past week’s achievements are a solid start.”
Demand over the second quarter will be 23.1mn bpd below the amount a year earlier, the IEA said, and the recovery will be slow, with consumption in December still down 2.7mn bpd y/y.
Despite OPEC+ efforts, and sharp declines in the output of other producing nations, stock build-ups still threaten to overwhelm the indus- try’s logistics. Available storage capacity could
be filled within weeks, the IEA said, with bot- tlenecks already emerging in other parts of the logistics chain. Chartering costs for very large crude carriers (VLCCs), which are increasingly being used for floating storage, have doubled since February, the agency estimated.
“Never before has the oil industry come this close to testing its logistics capacity to the limit,” it said.
While low oil prices would normally come as a benefit to consumers, this benefit is diminished because around 4bn people are currently living under some form of coronavirus (COVID-19) lockdown.
“Low prices threaten the stability of an indus- try that will remain central to the functioning of the global economy,” the IEA said. “Even with demand falling by a record amount this year, oil companies still face the challenges of investing to offset natural production declines and to meet future growth.”
The IEA predicted that capital expenditure in the global upstream industry would slump 32% this year to $335bn, marking its lowest level in 13 years. Economies heavily dependent on oil revenues could jeopardise already fragile social stability. Cash-strapped oil companies will also find it harder to invest in technologies needed for the clean energy transition.
Brent futures are down 7.6% as of 11:00 EDT at $27.40 per barrel, whereas West Texas Inter- mediate (WTI) has weakened 3.1% to $19.50.™
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w w w . N E W S B A S E . c o m Week 15 16•April•2020