Latest reports indicate that the virtual meeting has already been delayed from Monday to later in the week, to allow more countries to attend, but it is still unclear if Washington will be represented.
The delay has already dampened some of the initial optimism about the initiative, which bumped prices up by 25 percent on Friday. But more disappointment should be expected soon.
The mantra inside OPEC headquarters should be: “Wait and do nothing.”
In his epic book written in the 5th century BC, “The Art of War,” Chinese military strategist Sun Tzu suggested that “the supreme art of war is to subdue the enemy without fighting.” A more modern tactic in the professional cycling arena is known as the “sur place” – where a sprint cyclist slow pedals at first – until the opponent is forced to make the first move – before delivering the winning move.
When looking at an oil price or market share war, OPEC and its allies should understand that playing the long game may well be advantageous. By doing nothing, Riyadh, Moscow and the UAE, to name a few, can force their rivals to act before using their own arsenal of measures.
The global oil market fundamentals in principle have not changed over the last few days. The novel coronavirus is expected to destroy 17-20 million barrels per day of demand, almost one fifth of global demand. This estimate is highly uncertain, and is based on the fact that more than a quarter of the world’s population is in total lockdown. No agreement to cut production at present will bring oil prices to levels that OPEC is looking for.
At the same time, the volume of oil in storage tanks is likely to increase by an unprecedented 1-1.8 billion barrels worldwide over the coming months, preventing any short-term price increase. For the next few months, the main issue to be discussed within oil circles in Riyadh, and perhaps Abu Dhabi and Moscow, is to keep the pressure on.
By the end of this year, record volumes of oil in storage, demand destruction and financial constraints will deliver the rewards to OPEC+ that years of unilateral production cuts have not achieved. Oil produced outside OPEC will be hit and their companies will face bankruptcy. Even when oil prices recover eventually, this oil production will return only partially. For US shale oil producers, the choice is clear: go bankrupt or shut in production. Survival of the fittest will remove millions of barrels of daily output from the market.
By letting markets do OPEC’s work, Riyadh and their low-cost allies can reap the rewards. If, however, OPEC+ and others decide to cut now, the market will only react for a very short period while some adversaries of OPEC will get some breathing room. In the end the results will be a double whammy.
If OPEC uses its market stabilization instruments right now, it will fail. By not doing anything at all, OPEC can retain its power in the market, and give itself a larger upside potential from a future cut by Riyadh and others when the time is right. On this point, Sun Tzu is also illuminating: “The opportunity to secure ourselves against defeat lies in our own hands, but the opportunity of defeating the enemy is provided by the enemy himself,” he wrote. OPEC should take note.
Cyril Widdershoven is a Middle East defense energy analyst and the Director at Verocy B.V., a consultancy based in the Netherlands, and Global Head Strategy & Risk of Berry Commodities Fund.