• 4 minutes China 2019 - Orwell was 35 years out
  • 7 minutes Wonders of US Shale: US Shale Benefits: The U.S. leads global petroleum and natural gas production with record growth in 2018
  • 11 minutes Trump will capitulate on the trade war
  • 14 minutes Glory to Hong Kong
  • 3 mins Yesterday Angela Merkel stopped Trump technology war on China – the moral of the story is do not eavesdrop on ladies with high ethical standards
  • 5 hours China's Blueprint For Global Power
  • 2 hours IMO 2020:
  • 2 hours World Stocks Drop And Futures Tread Water After China Reports Worst GDP Growth In 30 Years
  • 10 hours National Geographic Warns Billions Face Shortages Of Food And Clean Water Over Next 30 Years
  • 10 hours ABC of Brexit, economy wise, where to find sites, links to articles ?
  • 6 hours Why did Aramco Delay IPO again ? It's Not Always What It Seems.
  • 3 hours Deepwater GOM Project Claims Industry First
  • 10 hours Joe Biden, his son Hunter Biden, Ukraine Oil & Gas exploration company Burisma, and 2020 U.S. election shenanigans
  • 11 hours PETROLEUM for humanity 
  • 4 hours Brexit agreement
  • 10 hours Idiotic Environmental Predictions
Nick Cunningham

Nick Cunningham

Nick Cunningham is an independent journalist, covering oil and gas, energy and environmental policy, and international politics. He is based in Portland, Oregon. 

More Info

Premium Content

OPEC’s Struggle To Avoid $40 Oil

A few weeks ago, OPEC+ was mulling the possibility of exiting the production cut agreement because the oil market was at risk of over-tightening. Now Saudi Arabia is scrambling to extend the cuts and may even unilaterally lower its own production further in an effort to head off a price slide.

On Monday, officials from Saudi Arabia and Russia reportedly discussed a possible scenario in which oil prices crashed below $40 per barrel, a recognition that the market has rapidly deteriorated. They view that outcome as a possibility if they can’t agree on an extension. “Today there are big risks of oversupply,” Russian Energy Minister Alexander Novak said in Moscow after meeting with Saudi oil minister Khalid al-Falih. “We’ve agreed that we need to run a deeper analysis and to see how events unfold in June.”

Russian President Vladimir Putin seemed to fuel speculation of a rift in Vienna in comments to Interfax news last week. “Of course Saudi Arabia wants oil prices to remain higher,” the Interfax news agency quoted Mr. Putin as saying. “But we have no such need due to the more diversified nature of the Russian economy.”

The Saudis, of course, are desperate to prevent such a downward spiral. “Both at the bilateral and the OPEC+ level, we work in order to take preventive steps so as not to allow that scenario to happen,” al-Falih said in Moscow. He is undoubtedly trying to convince Novak of the wisdom of extending the production cuts. Perhaps to sweeten the pot, Saudi Arabia is considering investments in “multiple” projects in Russia, including the Arctic LNG 2 gas project, a stake in Russian petrochemical company Sibur Holding, along with other projects in partnership with Gazprom and Rosneft, Bloomberg reports. Related: Platts: OPEC Oil Production Slumps With Saudis Cutting Deeper

The outlook for the oil market has darkened rather quickly. Less than a month ago, the IEA predicted a rather significant supply deficit in the second quarter even as it acknowledged some cracks in demand. But since then things have seemingly taken a turn for the worse, with oil posting its worst month since the financial crisis.

A growing number of analysts are drawing up downbeat assessments for the oil market next year. “The balances for 2020 were already worrisome, and the downgrade in demand we are contemplating put them potentially in the ugly category,” Roger Diwan of IHS Markit Ltd. told Bloomberg. Notably, top analysts see a supply surplus next year even if output from Iran and Venezuela fails to rebound. For instance, S&P Global Platts, as of now, estimates a surplus of 400,000 bpd in 2020, while the EIA puts the glut at a more modest 100,000 bpd. IHS Markit sees a whopping 800,000-bpd surplus.

The reason is that demand is cratering and U.S. shale is still expected to grow. “There is growing evidence of a sharper-than-expected slowdown in demand,” said Martijn Rats, oil analyst at Morgan Stanley, according to Bloomberg. The U.S.-China trade war has dramatically increased concerns about an economic slowdown.

The global economy is decelerating, with manufacturing activity around the world slowing down, a sure sign of an economy hitting some bumps. “You’ve suddenly got all sorts of countries around the world seeing their manufacturing indexes fall into contraction territory. That’s going to be bad for demand,” Bill O’Grady, chief market strategist at Confluence Investment Management, said in a Wall Street Journal interview. Related: Russian Energy Minister: Oil Could Still Drop To $30

But assuming OPEC+ decides to extend the production cuts, the group will go a long way in guarding against a more dramatic selloff, even if it requires ongoing sacrifice on their part. “The weak economic data and widening trade conflict have made for a gloomier demand outlook. In response, we have revised our third-quarter forecast for Brent down to $66 (previously $73),” Commerzbank wrote in a note. “We are leaving our year’s end forecast of $70 unchanged…This is because we are convinced that OPEC and Russia will do everything in their power to prevent an oversupply and to ensure higher prices.”

The bank noted that while Putin is skeptical of letting prices rise too far, and is generally satisfied with prices in their current range, he has also indicated that Russia and OPEC would make a joint decision. “This suggests that Russia will take part in a production cut agreement beyond mid-year,” Commerzbank concluded.

Saudi Arabia may go further. After the U.S. announced no new waivers for countries buying Iranian oil, there was speculation that Riyadh would decide to boost output, perhaps by as much as 400,000 or 500,000 bpd. But with the recent weakening of the market, that’s now off the table. Instead, Saudi Arabia trimmed output by 120,000 bpd in May from a month earlier. The Saudis “could potentially even take production lower,” Helima Croft of RBC Capital Markets told the WSJ.

By Nick Cunningham of Oilprice.com

More Top Reads From Oilprice.com:




Download The Free Oilprice App Today

Back to homepage



Leave a comment

Leave a comment




Oilprice - The No. 1 Source for Oil & Energy News
Download on the App Store Get it on Google Play