Two pivotal meetings of global oil producers plan to address the global oversupply of crude
Tomorrow [April 9] could be watershed moment for oil prices. In the face of plummeting oil prices, OPEC+ – the grouping of 24 oil-producing nations, made up of the 14 members of the Organization of Petroleum Exporting Countries (OPEC) and 10 other non-OPEC members, including Russia – is set to meet to agree production cuts to prop up prices.
West Texas Intermediate crude prices have been on a downward trajectory since the start of the year, more than halving to reach $28.06 per barrel on April 6. Covid-19 and the resultant drop in demand is largely to blame. The market is currently flooded with oil as supply outpaces demand by some margin.
Saudi Arabia and Russia are said to be working on the terms of a deal to cut crude output – both are expected to significantly curb their outputs. However, the wild card in the pack is the US, currently the world’s largest producer. OPEC wants the US to share the burden of cutting production to shore up prices, but questioned about his response to the organisation’s wishes, President Trump said:
“I have been against OPEC all my life. It’s illegal, you can call it a cartel, a monopoly … I couldn’t care less about OPEC.”
He also said that nobody had asked him about production cuts, but “if they ask, I’ll make a decision”. That said, the US is inadvertently helping with production curbs as rock bottom prices have forced US American producers to cut back on supply anyway.
The US does have less to worry about on the energy pricing front as much of its supply is for its domestic use. But the US Energy Information Administration (EIA) expects the US to return to being a net importer of crude oil and petroleum products in the third quarter of 2020 and will remain a net importer in most months through the end of 2021.
Change of status
In its April Short-Term Energy Outlook (STEO), the EIA points out that fewer barrels will be available for export as US crude oil production continues to decline. In addition, net exports of petroleum products will be lowest in the third quarter of 2020, when US refinery runs decline in response to lower demand for refined products.
In September 2019, the US exported 89,000 bpd more crude oil and petroleum products than it imported and became a net exporter of crude oil and petroleum products for the first time since monthly records began in 1973. It continued to be a net exporter through February when net exports reached 1.79 million bpd, and the April STEO forecasts that net exports will continue through May 2020.
However, the recent significant changes in global oil market dynamics have prompted the EIA to revise its March STEO forecast that US net exports would average 0.6 million bpd in 2020 and 0.3 million bpd in 2021. EIA now forecasts in the April STEO that US imports and exports will be nearly equal in 2020 and that US net imports will average 1.4 million bpd in 2021.
This reversal does place greater relevance on global pricing for the US and will have been on President Trump’s mind when he tweeted that the Crown Prince Mohammed bin Salman of Saudi Arabia and Russian President Vladimir Putin had begun talks on how to curb production on April 2 – a ‘fact’ disputed by the Kremlin at the time. Despite the rebuttal, his comments gave oil prices a welcome boost as they climbed nearly 50% in one day.
In subsequent tweets, President Trump has said that a 10-15 million bpd supply reduction is on the table from OPEC and possibly “much more” than that. But even at the higher end of the rumoured cuts, this will fall far short of addressing supply surplus: oil demand is estimated to be down 35 million bpd because of the near-global lockdown of people to stall the spread of Covid-19.
If cuts are not deep enough or unsustainable, oil prices could sink to single-digit lows, Fitch Solutions warned.
“While it is unlikely that nominal storage capacity will be breached, it is possible that the sheer scale of the oversupply will overwhelm global logistics chains, plunging Brent into single-digit lows,” the analyst said.
Therefore the market is hoping not only for agreement from tomorrow’s meeting, but an agreement at a level that will actually make a difference. The OPEC meeting on March 6 failed to reach an agreement on deep supply cuts, meaning that members could effectively pump as much oil as they liked from April 1. Also, Thursday’s meeting is the second attempt to hold such a summit; the first was put off as tensions reportedly flared between kingpins Saudi Arabia and Russia.
If OPEC and its allies do manage to put aside political squabbles aside to meet on Thursday, the outcome will be keenly watched by G20 energy ministers, who plan to convene an emergency meeting the following day to “address energy markets stability”. Any G20 pact will include oil producers the US, Canada and Brazil.
With so many pieces in play, the coming days could prove to be make or break for the oil sector and the tanker sector that supports it. And adding a fly to the ointment, Trump has warned he will not rule out tariffs on oil imports. Keeping to his ‘America first’ promise he pledged that he would consider placing tariffs on oil coming from “outside” to protect domestic energy workers and companies. “I’ll do whatever I have to do,” he said.