Page 7 - NorthAmOil Week 15

NorthAmOil COMMENTARY NorthAmOil
And not all markets have equal access to this remaining storage, which is mostly located in China and the US.
What the OPEC+ deal does is buy time, for fuel demand to recover, storage operators to overcome constraints and potentially expand their capacity, and other producers to make nec- essary cutbacks to stay afloat.
Lacklustre support
The US – concerned about the impact of low oil prices on its indebted shale oil industry – indi- cated it would help Mexico meet its quota by reducing its own output by 250,000 bpd. This may have helped break the deadlock, although Washington has not said whether it will impose cuts on US producers to achieve this, beyond those they have already made for commercial reasons.
The main risk to the OPEC+ deal is the absence of any other countries outside the group making firm pledges to cut their pro- duction. Saudi Arabia and Russia previously said they wanted non OPEC+ producers to take another 5% of global supply offline to support the industry. G20 energy ministers meeting on April 10 agreed to work together to ensure oil price stability, but did not announce any specific commitments.
OPEC+ sources told Reuters that Brazil, Canada, Indonesia, Norway and the US would contribute a further 4-5mn b/d to the cuts. But the countries have not confirmed making any promises. In any case, these will be unchecked voluntary cuts, likely guided by commercial considerations.
“Even though OPEC+ has decided to attempt to bail out the global oil market, the group has unfortunately only come up with half of the ran- som money,” Rystad said. “We believe the mar- ket’s disappointment will reflect in prices already from April due the lack of size and the speed of the supply removal.”
Moscow and Riyadh are particularly anxious to see the US, the world’s number one producer which extracted around 12mn bpd last year, join the pact. The US Energy Department (DoE) said last week that US oil firms were expected to tem- porarily scale back production by almost 2mn bpd anyway, because of cost-cutting measures. But without legal restrictions, these same firms
could simply increase flows again once prices recover.
There are some US officials calling for a legis- lative response, include Ryan Sitton, head of the Texas Railroad Commission that serves as the 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 uni- lateral 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.™
There are some US officials calling for a legislative response, include Ryan Sitton, head of the Texas Railroad Commission.
Some have urged the US to join OPEC+
in cutting supply,
but this would prove challenging.
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