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The OPEC Meeting Could Send Oil Prices Crashing Below $10

The current optimism of analysts and the media that an end to the ongoing OPEC+ oil price spat is near is entirely unjustified. The ongoing oil market volatility, the battle between leading producers for market share, the logistical impossibility of enforcing U.S. production cuts, and the continued demand destruction caused by COVID-19 are not issues that can be solved by an OPEC meeting. Immediately after Trump’s latest OPEC twitter offensive, Saudi Arabia and Russia came out with critical statements about the impact and influence of the US president on the matter. While Putin and Mohammed bin Salman are reluctant to bash Trump, the real power when it comes to the oil market does not lie with the U.S. President. The tweet by Trump claiming that MBS and Putin would agree to a 10+ million bpd production cut shows not only his overestimation of his own power over the two countries, but also shows a lack of knowledge about the underlying market fundamentals and the current demand destruction worldwide.  As former US president George W. Bush stated during his election campaign, which did not end well as we know, “it’s the economy stupid” that matters in the end. Trump’s tweets and general approach to this matter suggests he and his administration are out of touch with reality. Even if a Saudi-Russian combination would cut 10 million bpd, the oil price reaction would be minimal and very short-lived. At present, leading oil market experts such as Vitol, Trafigura and Goldman Sachs are warning of a total demand destruction of 20 million bpd or more. When looking at the cuts in global refinery runs, we have already hit levels of -17 million bpd or more. Downstream companies are cutting back on all production as demand from industry and consumers worldwide collapses. Lockdowns in more than half the world are having a major impact, hurting demand for oil, gas and other kinds of energy. Cutting 10+ million bpd of production is not a real solution and it could even cause markets to react negatively. When production cuts fail to send oil prices up, the fear in the market could hit historical highs, causing oil prices to fall to levels below $10 per barrel in the coming weeks. 

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The upcoming “OPEC+ and Friends” meeting is going to be a very tricky one. There is the very real possibility of the meeting failing as the targets that have been set are totally unclear. Saudi Arabia, probably supported by Abu Dhabi, called an emergency meeting, not only of OPEC+ members but of all oil-producing nations. That means that, at least according to Western media, the US is invited and will likely attend. In inviting the U.S., it seems that Saudi Arabia has called Trump’s bluff because by attending the meeting Washington will be implicitly stating that a possible production cut agreement would include the US. When looking at the US upstream oil and gas sector there is one thing you can state without any analysis….Washington and US oil and gas operators are not on the same page. Suggestions of Washington being able to control or even force US oil to cut production, even via legislation, are ludicrous and would end in a mammoth legal battle. Even if only Texas representatives attend, oil companies will be unlikely to comply, it is simply not in the US oil and gas DNA to work together on an international level. Free market economics is a cornerstone of U.S. society and business. 

The second major threat at the Monday meeting is that Saudi Arabia not appear to be at all convinced that it needs to change its current tactics. Its targeted goals of regaining market share, forcing Russia to come to the table and bringing non-OPEC producers such as U.S. shale to their knees are working well. Several Saudi officials have stated that they are willing to discuss a new agreement but only under the conditions that potential production cuts will be on the shoulders of all, not only Saudi Arabia, Russia, and UAE. In this light - Trump’s demand for a more than 10 million bpd cut from Russia and Saudi Arabia is unrealistic, to say the least.

Russia’s position has, until now, remained unclear. While Putin is still acting as though he has nothing to worry about, Russian oligarchs and the Russian leader are happy to debate any options that are on the table. For Russia, the current position taken by Trump is being seen as an opportunity to get some gifts from the U.S. very soon. Russia might consider cooperation with the U.S. if Washington agrees to bring an end to Russian sanctions. But that is not as important to Moscow as a strong relationship with Riyadh and OPEC going forward. Future opportunities with Saudi Arabia are more attractive to Putin than a positive relationship with a President that may not be re-elected this year. 

While all eyes will be on Washington, Riyadh, and Moscow in the coming day, there is a fourth group that is going to be vital at Monday’s meeting. In order to reach a 10 million bpd cut, OPEC will have to convince all other oil-producing countries to contribute. At present, convincing such a large list of independent nations to join these efforts seems unrealistic. Countries such as Libya, Iran, Iraq, Brazil, and Canada, are unlikely to agree at present to cut production. This is yet another reason that the OPEC meeting will likely fail on Monday.

The real fear for markets at the moment should be sentiment and expectation. After Trump’s tweet cited a 10-15 million barrel per day cut, oil prices have soared and anything less than that will be seen as a failure. After what is looking set to be a fairly quiet weekend for energy markets, a Monday failure with plenty of media attention is likely to drive markets into a frenzy. This fear, combined with continued demand destruction could serve as a serious problem for oil markets next week. 

With this in mind, the rational short-term approach of OPEC+ should be, especially for Riyadh and Moscow, to not move at all. Don’t increase production, stand on the quay and watch the US shale and non-OPEC VLCCs fill oil storage to the brim. If OPEC+ cuts without the assistance of other nations it will lose future leverage and markets may crash anyway.  By doing nothing, Saudi Arabia and Russia can maintain the illusion that a production cut from OPEC+ would save markets.

By Cyril Widdershoven for Oilprice.com

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Cyril Widdershoven

Dr. Cyril Widdershoven is a long-time observer of the global energy market. Presently, he holds several advisory positions with international think tanks in the Middle… More

Comments

  • Billy - 3rd Apr 2020 at 6:51pm:
    Yeah I don’t know about all of that. Cutting 10m would help. Maybe not today, but it would help for a faster recovery. It’s going to get cut anyways when all the storage fills up. Best thing for the US- Tariff all imported oil, by 100% or more use the $ to convert our refineries to Sweet Crude and be done with the Middle East. Russia and Saudi’s won’t win this one in the long term.
  • Muyiwa - 3rd Apr 2020 at 6:54pm:
    Quite a pessimistic view. Many however have a different opinion - hence the rally in prices the last couple days. As a matter of fact, the outcome could well shoot prices further up - upwards of +$40 Brent.
  • Brian Bresee - 3rd Apr 2020 at 10:57pm:
    Excellent article, you make an good case to be very careful with a long oil position this coming Monday, especially with WTI now already approaching $30/barrel. There is not much upside left in the current environment, but it seems there will still be a temporary boost to prices with a coming announcement, all these State players aren't coming to the meeting to announce nothing.

    Hype alone can profit oil producers billions, especially in a bad environment as we learned this week. Trump's hype may have saved a few US oil producers with the temporary relief his hype brought. It seems we are witnessing a rare reversal of roles, as it is usually OPEC or Russia that does the hype job.
  • Mamdouh Salameh - 4th Apr 2020 at 5:29am:
    The coming OPEC+ meeting on the 6th of April is doomed for the following reasons.

    The first is that no oil production cuts not even 20 million barrels a day (mbd) to offset the loss of the global oil demand could have any positive impact whatsoever on oil prices while the coronavirus outbreak is raging.

    The second reason is that Saudi Arabia and Russia together couldn’t muster 10 mbd cuts nor do they have the intention to do so for economic and political reasons. Russia may only agree to delay plans by Russian oil companies to raise production by 300,000-500,000 barrels a day (b/d). This won’t satisfy Saudi Arabia.

    If President Trump wants a deal to save the sinking US shale oil industry, he has to agree a substantial cut in US oil production something neither he nor the US Congress will accede to.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • peter mueller - 4th Apr 2020 at 6:13am:
    When the USA is not really participating on the cuts - the prices will crash and none of the Shale Oil Companies will survive.
    At the Moment this is Presidents Trumps atitude. Fact is that the Opec+ Meeting will be rescheduled for 2-3 days. That inclines deep trouble between all parties. Iran for example with the Top Grade quality Oil will pressure for US cuts. Minor parties like Norway not even included.
    The Texas Railroad Commission would be wise to accept deept cuts for the USA. Mr. Trump will loose Texas in the Election.
    As long as Mr. Trump thinks that he can play Russia against Saudi Arabia he is dead wrong. He will looose that Battle like the Corona Virus Battle.
  • Jefferson Lane - 4th Apr 2020 at 8:00am:
    "It's the economy stupid" was coined by James Carville during CLINTON'S reelection campaign, which did end well because he was reelected. For the record, so was George W. Bush.
  • Mark Scott - 4th Apr 2020 at 10:01am:
    Yikes, somebody got caught with their pants down shorting. Articles on this site are becoming increasingly desperate to depress oil. This article is just downright silly and stinks of desperation.

    The mere hint of an oil cut sent oil soaring 40% in minutes. Imagine if they actually did it....hello $40 oil.

    Bad times for shorts who got caught with their pants down this week.
  • Veritas Vern - 4th Apr 2020 at 10:21am:
    The attempt to destroy shale will never succeed because Russia and Saudi cannot affort $10-20 oil and will have serious impacts on government revenues and the ability to fund social programs. Free markets work better in this regard as while we do have the same gov rev issues the oil industry just consolidates and emerges stronger in the end with lower operating costs.
  • Lilica Lazarini - 4th Apr 2020 at 11:11am:
    Dear Cyrill, I think that you are absolutely wrong. After Trump twited about the meeting on Monday, the price hit more than 20%, so it's obvious that the market is answering on the outcoming meeting. As it concerns China, it is a giant that will eventually wake up from covid19, and start to suck the oil. Then, even Saudi is not comfortable with the low price, because even though they have oil, they want to sell their product as high as it is possible, they need cash flow, Russia too.
  • E.M. Shalev - 4th Apr 2020 at 11:19am:
    There really is no need to exert political pressure on producers to increase or decrease production. US shale oil should be understood as a price stabilizer. When there is too much production, such as the current market flooding by KSA, driving prices down to a level no longer economical, shale producers should close the tap to the level required to survive without going bankrupt. When there is too little production, such as when OPEC artificially reduces production to raise prices, shale producers should open the tap to the level to ensure a stable benchmark price at, say $50 per barrel. If the US shale industry can organize themselves in such a manner, they will remain viable and profitable and with the Joker in their hand.
  • Joshua Snider - 4th Apr 2020 at 2:53pm:
    > For Russia, the current position taken by Trump is being seen as an opportunity to get some gifts from the U.S. very soon. Russia might consider cooperation with the U.S. if Washington agrees to bring an end to Russian sanctions.

    A lot of those sanctions are in retaliation for Putin's support of Trump, so that's not happening.
  • D P - 4th Apr 2020 at 8:23pm:
    “As former US president George W. Bush stated during his election campaign, which did not end well as we know, “it’s the economy stupid” that matters in the end.“

    George W. Bush did not say that, James Carvil did. It was not even during George W. Bush‘s election campaign (both of which turned out fine), it was during George H. W. Bush’s. Maybe you should look up the term ‘credibility’. Yours seems to be going south.
  • John Carlson - 5th Apr 2020 at 6:51am:
    So what the author forgets is the whole world is burning at present. So yes the markets will shift under the weight of the present economy and over production, but tomorrows meeting could go either way. You will see renewed investment in oil if they decide to cut 5 million barrels ...the present economy in every nation is reseting everything we know on historicals for oil markets or Us markets in general. Basically something has to give or the whole system crashes. Will it give tomorrow? I dont know. I can say russians and saudis are hurting the hell out of each other while our oil market is more inline with our current economic markets.
  • michael nosworthy - 7th Apr 2020 at 1:14pm:
    This is an optimistic viewpoint. The world is going into lockdown pretty much everywhere. Current demand say, 100 million barrels. If you look at Italy as an example of a country in lockdown, its oil demand has fallen 83%. A 10 - to 15 million barrel per day cutback won't come close to solving the problem. The US economy is only partly locked down yet but is heading for the full crunch - Trump's dithering has simply allowed the virus to spread all over the country and all major urban centes will have to follow New York's example. The dithering means it will take longer to reopen.

    In the US oil prices have to go down - where are they going to put all the unused oil? The producers will simply stop drilling new shale wells and curt back production. Ultimately the natural decline on shale reservoirs which is very high will bring US production down quickly when demand picks up.

    OPEC is powerless to balance production with demand when there is no demand! The negotiations between Russia & Saudi is positioning for long term production - in the short term there aren't many customers!

    China will pick up first, but China's main export markets are closed so its demand won't pick up very quickly.
  • Freezer Burn - 9th Apr 2020 at 8:10am:
    "As former US president George W. Bush stated during his election campaign, which did not end
    well as we know"!????

    Both the election and reelection went very well indeed.

    If some "long-time expert" does not even get this detail right (even if he meant Bush Sr, what would be the current context for oil here and now? Zero context and relevance. How can he get anything else right? This is not only barrels, this is geopolitics and Saudi cannot play hardball with Trump for long. Not unless they want Iran drone-bombing the house of Saud regime every week. And as far as Russia is concerned, they have lost real income per capita every year since Crimea. Pretty hard for them to stomach a protracted $20/barrel war, when it's half their GDP.

    Now you decide which expert you want to believe, but the author probably needs only a few hundred believers to cover his oil shorts out.
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