Saudi Arabia, Russia, the US and other top oil producers are due to start a series of meetings on Thursday to discuss a massive cut in production to face up to the worst glut ever witnessed in the history of oil markets.
The coronavirus pandemic has caused an unprecedented drop in the use of oil worldwide, from driving cars to air flights and industrial usage, leading analysts to predict a massive surplus of 28 million barrels in daily oil output this month.
Thursday’s meeting, between members of the Organization of the Petroleum Exporting Countries (OPEC) and a group of allied producers known as OPEC+, is expected to find an agreement on a cut, but nobody expects them to approach the level required to balance oil markets in the short term.
US President Donald Trump has said he expects OPEC+, represented by Saudi Arabia and Russia, to cut 10-15 million barrels per day. But the Kingdom, the world’s largest exporter with the lowest production costs, has insisted that any cut must be shared by all producers worldwide.
“I think OPEC+ may agree a cut smaller than 10 million barrels per day,” said Robin Mills, CEO of consultants Qamar Energy. “That will at least take the political heat of OPEC. Oversupply will happen and the market will take care of the rest.”
Oil prices fell by half last month after OPEC and Russia failed to agree on an output cut in talks on March 5. Saudi Arabia subsequently hiked its output to a record 12.3 million bpd in April, up nearly 3 million bpd from March, raising the bar for any new agreement.
Analysts at Rystad Enegy expect oil storage tanks to fill at an unprecedented rate of 28 million barrels per day in April.
“Given a 28 million barrel per day (bpd) oversupply in April, storage of crude will build like we have never seen before, and this is currently not reflected in market prices,” said the company’s head of oil markets Bjornar Tonhaugen. Prices will go down to “where they need to be for the production and demand to come closer to balance,” he added.
International Energy Agency head Fatih Birol echoed this sentiment on Friday, saying that deep oil output cuts would not prevent a huge build in global crude inventories over the second quarter.
Thursday’s meeting of OPEC+ will be followed by a meeting of energy ministers of the Group of 20 most powerful nations, who are expected to pledge additional cuts in production. In reality, it is unclear which of these countries, including the US, UK, Norway and Brazil, will make a deliberate cut in production as many of them are cutting anyway because of low prices.
The extra supply has created a shortage of tankers and storage for crude. Some tank farms have already reported that they are running out of space for excess oil.
Very large crude carrier (VLCC) rates surged to around $235,000 a day last week, up from around $30,000 per day at the beginning of March, as exporters look for places to park additional crude. Rates have since fallen around half to about $125,000 per day on anticipation of the new deal.
All about that baseline
Saudi Arabia and Russia have yet to agree on where to cut from. While Moscow has pushed for a baseline in the first quarter of the year, Riyadh and other OPEC members wants the benchmark to reflect April’s higher output level.
Further complicating calculations, Russia has said that any natural decline in production by producers due to the collapse in prices would not count as a voluntary cut agreement.
“These are absolutely different reductions. You are comparing overall decline in demand with cuts aimed at stabilizing global markets,” Kremlin spokesman Peskov said on Wednesday. “These are different concepts and they could not be equaled.”
Peskov’s comments were likely aimed at the US, where President Trump has remarked that while there is no plan in place as of yet to lower oil production, cuts are already occurring.
“I think it's happening automatically but nobody's asked me that question yet so we'll see what happens,” Trump said Tuesday when questioned as to whether OPEC had already asked for production cuts.
The US Energy Information Administration on Wednesday slashed its 2020 oil production forecast for the US by more than 1 million bpd due to collapsing prices and plummeting demand.
OPEC members, Russia, and other producers, known as the OPEC+ group, will meet by video on Thursday, while energy ministers from the G20 will hold a conference call on Friday to discuss the market.
The price war has already left casualties in its wake. US shale oil firms have been under particular threat as many were already highly leveraged before the crisis began, and require a significantly higher price to operate in comparison to other global producers.
Whiting Petroleum Corporation, a Denver-based shale oil firm, filed for bankruptcy last week, citing a “severe downturn in oil and gas prices” attributed to the Saudi-Russia price war and the coronavirus pandemic.
Some other US shale producers have since urged state regulators to clamp down on crude production. One firm noted that regulators and the Trump administration need to “step up to the plate and save Texas and the American energy industry right now, before it is too late.”
Even the oil supermajors are not safe. Royal Dutch Shell Plc, Chevron Corp. and Total SA have all halted share buybacks to preserve dividend programs.
Capital expenditure from the majors has also been slashed. Exxon Mobil, the world’s second most valuable energy company after Saudi Aramco, cut its spending to a four-year low on Tuesday. In a tally in late March, North American oil and gas producers were found to have already cut capital spending by around 30 percent on average.
“What will come out of the upcoming meeting will differently effect energy stocks in the short term but the upside is limited. Over the mid-term we believe pick up in global demand and economic activities will determine the valuations for the sector,” said Majd Dola, equity portfolio manager at First Abu Dhabi Bank.