Predictions Before Thursday’s OPEC+ Meeting

Background 

Global oil prices have sparked panic among many of the world’s oil producers prompting an emergency OPEC+ meeting to discuss how to bring the market back into balance. With the ongoing global pandemic decimating demand, the only solution to bring order back to the market is through production cuts. 

The OPEC+ meeting was originally scheduled for Monday but tensions between two of the world’s top three oil producers, Saudi Arabia and Russia, prompted the meeting to be delayed. On Tuesday, Russia announced that it would be participating in Thursday’s meeting but it appears another noteworthy invitee, the United States, will not. White House sources said no one from the Trump Administration was expected to attend Thursday’s call, which means “the call – whose sole purpose is to get the U.S. to join the production cuts – will be moot” [1].  


Playing Hard Ball

The issue lies with oil producing nations agreeing upon global production cuts. While Saudi Arabia, Russia and other members of the group (OPEC+) have expressed willingness to return to the bargaining table, they have made their response conditional upon actions by the United States and other countries that are not members of OPEC [2]. They have made it clear that any production cuts must be a joint global effort.

The largest players (Saudi Arabia and Russia) have both agreed to make cuts if the United States agrees to play ball. However, it seems Washington is relying on free-market mechanisms (helped by OPEC+ action). This is in line with the White House’s insistence that it would not intervene in the private market [2]. However, that is not enough for OPEC+, and certainly not Russia. Kremlin spokesman Dmitry Peskov made it clear through a Wednesday conference call with reporters that market-driven declines in oil production shouldn’t be considered as cuts intended to stabilize the market [3]. Unfortunately, Russia’s participation is highly contingent on the United States and it seems unlikely any output cuts will be initiated if the U.S. does not join. 

 “With regards to media reports that OPEC+ will require the United States to make cuts in order to come to an agreement: The EIA report today demonstrates that there are already projected cuts of 2 (million bpd), without any intervention from the federal government,” the U.S. Energy Department said [3]. It should be noted that U.S. independent oil producers reportedly have told OPEC that they will voluntarily cut output, but U.S. oil majors worry about the antitrust issues around any coordinated effort [4]. While Washington might be playing hard ball, independent oil producers seem to want to join the fight to save their ailing industry. 


OPEC+ Just A Formality?

While many oil producing nations have insisted their participation in production curtailment is contingent upon the engagement of the world’s largest oil producer, many industry experts predict the meeting is simply a formality. Despite the United State’s formal reluctance to participate in OPEC+ talks, evidence suggests global leaders have already had side discussions about such production cuts. If this is the case, the meeting is simply set to fine tune the details on how much each country is expected to cut. Manish Raj, Chief Financial Officer at Valdera Energy, is one such expert that believes the group has a pre-planned agreement in place [5]. His argument has some weight – if the OPEC+ parties do not already have an agreement in place, they would have just called off the meeting (or at the very least postponed yet again). 

Without the support of the United States enacting cuts immediately, it will be difficult to bring off a significant amount of production off the global market. Experts predict the largest cuts to come from Saudia Arabia, the United Arab Emirates, and Kuwait who vastly contributed to OPEC’s 28.97 million barrels a day of production in March—up 980,000 barrels a day from February [5]. This group has already been in close contact throughout the span of the ongoing price war. “If the cartel fails to secure a meaningful deal that ends the current price war, oil could end up tumbling back to levels not seen in 17 years around $20,” said Lukman Otunuga, senior research analyst at FXTM. On the other hand, “a positive outcome to the meeting should offer some light at the end of the tunnel for oil, opening the path towards $40” [5]. While many predict any actual production cut deal appears unlikely if the U.S. does not join in, others expect more has been going on behind the scenes and a positive outcome of Thursday’s meeting is all but inevitable.  


Prediction: 

Based on the current price environment, it seems unavoidable that Thursday’s meeting will bring about global production cuts. Still, decisions by OPEC+ have been known to be notoriously difficult to reach and with the U.S. refusing to participate, the outcome of Thursday’s meeting seems grim. 

Evidence and a proven track record suggest talks will fall apart between major players and no production cut deal will be reached. Bad news as producers continue to oversupply an under demanded market.    


Be sure to tune in Thursday for a recap of the “Most Important Oil Meeting Ever”!   


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References

[1] https://www.reuters.com/article/us-oil-opec-russia/russia-confirms-its-participation-in-opec-meeting-on-april-9-idUSKBN21P14N

[2] https://oilprice.com/Energy/Crude-Oil/US-Oil-Production-Could-Fall-By-2-Million-Barrels-Per-Day.html

[3] https://oilprice.com/Energy/Crude-Oil/Historic-Oil-Deal-On-The-Verge-Of-Collapse-As-Russia-Balks-At-US-Cuts.html

[4] https://oilprice.com/Energy/Oil-Prices/Oil-Spikes-After-Algeria-Says-OPEC-Cuts-Could-Reach-10-Million-Bpd.html

[5] https://www.marketwatch.com/story/opec-is-set-to-face-oil-challenges-head-on-in-thursdays-virtual-meeting-2020-04-08

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