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Tom Kool

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Tom majored in International Business at Amsterdam’s Higher School of Economics, he is Oilprice.com's Head of Operations

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Oil Price Armageddon As OPEC+ Disintegrates

It appears that the OPEC+ alliance may soon be over as Russia refuses to cut and its oil minister hints at increasing production.

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Friday, March 6th, 2020

Oil prices plunged by more than 8 percent after the OPEC+ meeting broke up with no deal. Saudi Arabia and Russia negotiated behind closed doors in Vienna, but Moscow refused to sign on to deeper production cuts. Now there is uncertainty about whether the OPEC+ alliance will survive. A day earlier, OPEC essentially issued an ultimatum, calling for 1.5 mb/d of production cuts, but suggested that no deal would occur without Russia. At the time of this writing, oil prices were in freefall. WTI was below $43 and Brent near $46. 

OPEC+ facing demand “trap.”Moscow has balked at deeper production cuts not only because it has a stronger stomach for lower prices than Riyadh, but also because the oil market is suffering from a demand trap. That is, restraining supply may not rescue prices when global oil demand has fallen so sharply. 

What next? At the time of this writing, there is some speculation that not only has OPEC+ failed to agree on additional production cuts, but also that the current OPEC+ agreement – the one from December – is set to expire in March, after which producers can raise output. The entire OPEC/non-OPEC alliance is now on the rocks, although the group pledged to continue to talk going forward. 

Related: Iraq Plans Production Surge In The Face Of New OPEC Cut

Exxon maintains aggressive spending. Despite pressure from investors to focus on cash flow and only modest growth, ExxonMobil (NYSE: XOM) laid out its medium-term corporate strategy in an investor presentation this week, one that continues to rely heavily on production growth. Exxon trimmed its spending somewhat, but remains largely unbowed in its view that heavy spending will pay off. The company’s share price fell sharply on the news. Meanwhile, Chevron (NYSE: CVX) promised to earmark more money for shareholders, pledging $80 billion in payouts over five years. 

European and American oil majors diverge. European oil majors have adopted climate targets and have made initial investments in renewable energy, promising to gradually make a transition to a lower-carbon portfolio. The American oil majors are largely digging in and rejecting such strategies. 

IHS: Oil demand to fall by most in history. Global oil demand could fall by as much as 3.8 mb/d in the first quarter, the largest contraction in history, according to IHS Markit. A growing number of analysts now see negative oil demand for the full year in 2020. 

Airlines could lose $113 billion. Airlines could lose as much as $63 to $113 billion this year due to the coronavirus, according to the International Air Transport Association. 

CNPC declares force majeure on LNG. CNPC declared force majeure on prompt natural gas imports, the second Chinese buyer to do so. 

Gas industry seeks to block gas bans. A growing number of U.S. cities are exploring bans on natural gas hookups in new commercial and residential construction. In response, gas lobbyists are pressing state legislatures to preempt municipal bans. Arizona recently passed a law blocking cities from banning gas hookups.

Gas falling out of favor with investors. Bloomberg notes that investors are souring on natural gas, with local gas distributors now trading for less than electric utilities in relation to projected earnings. “Right now, anyway you look at it, natural gas is not seen as something that is very friendly,” Shahriar Pourreza, an analyst at Guggenheim Securities LLC, told Bloomberg. The poor performance reflects dim long-term prospects. 

Related: Are Oil Majors Facing A Terminal Decline?

Cargo at U.S. ports down 20 percent. Cargo volumes at U.S. ports could be down by as much as 20 percent in the first quarter.

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ConocoPhillips exits DJ Basin. ConocoPhillips (NYSE: COP) agreed to sell its Niobrara assets for an estimated $380 million, exiting the basin.

Warren Buffet bails on Canadian LNG. Warren Buffet’s Berkshire Hathaway decided against investing $4 billion in an LNG and pipeline project in Quebec.

By Tom Kool for Oilprice.com

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  • Mamdouh Salameh on March 06 2020 said:
    Neither a deepening of existing production cuts by OPEC nor a flooding of the oil market also by OPEC members will have any positive impact on oil prices or on their oil export revenues respectively while the coronavirus outbreak is still raging.

    Russia’s cooperation with OPEC under what has become known as OPEC+ is based on mutual benefits. It never meant that Russia should follow everything OPEC suggests. Russia believes that deeper cuts at current situation are futile. Furthermore, Russia’s economy can live with oil prices at $40 a barrel or lower compared with $85 or higher for Saudi Arabia and most OPEC members.

    OPEC members should realize that the oil price ordeal is not the result of a weakness in the global economy leading to weak oil demand but is the result of the outbreak hindering oil from reaching its main markets. The minute the outbreak is contained and the global economy resumes its normal activities, oil demand and prices will recoup all their losses.

    Therefore, the only thing that the global economy and OPEC members can do is wait and see.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Aceof Spades on March 07 2020 said:
    Last Friday I attended a benefit that was organized by a group of doctors and sure enough many discussions concerned the coronavirus. To make the long story short, all the doctors I talked to agreed with me that the only possible way that COVID-19 could have been stopped in China…a country so densely populated…is through a vaccine. How is it possible for only a few hundred thousand to become infected with a highly contagious virus in a country of nearly 1.4 billion people? The other possibility is that China is lying about the number of cases, but Tim Cook doesn’t think that China is lying and I believe Tim.

    So the virus is effectively stopped in China, and Mr. Cook has confirmed it. An effective vaccine can certainly stop this highly contagious virus. Nothing else can….because COVID-19 can be spread by people without symptoms…which makes it much more contagious than the flu.

    Mr. Cook has thousands of employees in China…and access to hundreds of millions of e-mails between Chinese people on a daily basis. The only way he would make such a definitive statement about the state of COVID-19 in China is if he knew for a fact that China has already been vaccinating its people.

    There is only one explanation for China already having tens of millions of doses of vaccines: COVID-19 was engineered in a bio lab.

    The release of the COVID-19 was not accidental... but guess what....it was not ordered by China... but it was from a Chinese bio lab... and this lab also had the capability to make vaccines from day zero. Clearly there was foul play.

    So why would anyone do this? Why would an operative inside a Chinese bio weapon lab unleash the virus in order to force China to vaccinate its population against a virus made in China's labs?

    Well, I have my opinions as to who did it and why. What is certain is that those responsible for this evil plot will easily triple their net worth.

    So, China is pretending to be working on vaccines that it already has, and soon Xi will lie to the world that they finally succeeded in making a vaccine….because China doesn’t want to look bad and admit to what has happened. China is acting exactly how the “illuminated architects” responsible for this COVID-19 calamity have predicted China would behave.

    Meanwhile, innocent people are dying all over the world.

    The year of the rat indeed.

    It should also be noted that if we're going to change the rules on how we determine the mortality rate from the coronavirus, then we must also change the rules for how we calculate it for the Flu. Just like the cases of coronavirus are under-reported, so are the cases of the flu under-reported. The most important parameter we should be after is the comparative mortality rate between the flu and COVID-19. So, if the flu is at 0.1% mortality rate based on cases reported with significant symptoms, then COVID-19 is at 3.5% and climbing. Also, if not for the flu vaccine, we would have ten times as many deaths from the flu. We do not have this luxury with COVID-19...yet.... although it seems that China does.
  • Bill Simpson on March 07 2020 said:
    Putin is smart. He wants oil to stay low enough to bankrupt the US shale drillers, while staying high enough to keep his Russian economy afloat. He is hoping to also wreck the US economy, along with the European economy, by causing problems in the credit markets, as the shale oil drillers default on billions of dollars of loans. With the virus spreading at the same time, he is hoping for a recession in the US, which would bankrupt thousands of highly leveraged US firms. That might eventually cause a US depression, unless the Federal Reserve Bank, or the US government does another TARP like bailout of the fat cats. They do that, and Putin wins there too, because it will spread division inside the US population, as everyone who is not doing well, ask why they are not getting bailed out. He cannot lose.
    Putin has an aim is to destroy the US, without causing undue suffering inside Russia, which might cause his overthrow. He knows that Russia is so vast, with so many natural resources, that it can survive another Great Depression in the West. Of course his strategy is risky, since the military might end up running the US. They might use the enormous military might of the US to start kicking other countries around, leading to WW III, bringing on the nuclear apocalypse. I doubt Putin will enjoy that, since nobody in the Northern Hemisphere would survive it. You might want to head on down to French Polynesia, or New Zealand, with all the billionaires who bought ranches down there after 9/11 and the Global Financial Crisis of 2008. They are not stupid. They know debt can not increase much faster than real economic output does forever. Eventually, the system will break. Once interest rates on US debt go negative, we will not be too many years away from the Great Financial Collapse. The Russian and Chinese central banks are stocking up on gold bars for a reason.

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