Global oil production cuts could end up rising to 20 million bpd, including forced reduction of output such as already underway in the United States, the Saudi Energy Minister, Abdulaziz bin Salman, told the Financial Times.
“If prices stay within the border of $35-$40 a barrel . . . I wouldn’t be surprised if natural declines are even more severe as we move into the next few months,” Saudi Energy Minister, Abdulaziz bin Salman, said.
Chances are prices will stay low: oil traders did not react with much enthusiasm to the news that OPEC+ would cut 9.7 million bpd in production starting May, nor did they cheer a decision by G20 producers to throw their weight behind the cuts and add their own supply curbs that would bring the total reduction on global supply to over 13 million bpd. In fact, earlier this week the chief executive of Gazprom Neft said prices could rise to $40-45 only under a best-case scenario and it would only happen towards the end of the year.
Natural declines are already happening: producers in North Dakota are idling rigs and wells, and Texas energy regulators are considering adding an official element to involuntary cuts that smaller producers are insisting on.
The crisis was brought about in part by Saudi Arabia’s declaration of a price war against Russia last month, when it said it would raise its oil supply to 12.3 million bpd. Already strained by the rising coronavirus threat, oil prices tanked pretty much as soon as the statement was out.
“[Engaging in a price war] was an unwelcome departure from our end, but we had to because of a desire to capture some revenues versus sitting on our hands and doing nothing,” prince Abdulaziz told the FT, adding that despite the price war, Saudi Arabia did not “have some sadistic approach of killing competition.”
By Irina Slav for Oilprice.com
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I am respectfully offering Your Highness my advice that production cuts no matter how big they are would hardly have a positive impact on oil prices as long as the coronavirus outbreak is still raging.
I ask Your Highness how could even 20 million barrels a day (mbd) cut or any cuts for that matter impact positively on a global oil market sagging under the weight of a glut estimated by some accounts at 1.8 billion barrels (between global inventories and excess crude in the market) and a global demand decline estimated at 30 mbd with half the world’s population in quarantine.
Would it not be better to save your country’s oil wealth for when the good days are back. The coronavirus outbreak will be history soon but oil will continue to be the backbone of the global economy throughout the 21st century and far beyond.
A positive sign is that China is bouncing back having managed to stop the outbreak in its tracks. Moreover, once the outbreak is controlled, the global economy and China's will behave like a patient who has been deprived of food while in quarantine. Once he is out of the quarantine, his appetite will be rapacious and that is exactly how the global oil market will behave doubling if not tripling crude oil imports. Both global oil demand and prices will recoup all their losses.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London