Oil price has hit a low of $45 per barrel after OPEC and its Russian partner failed to agree on further production cuts, causing chaos in the oil market, and leaving it to nosedive. For the last two weeks, news reports have been against the OPEC meeting and letting the oil market take its turn under the current coronavirus situation and behave according to the market forces .
We have been calling for halting and postponing any OPEC meeting at a time when the world has been observing the impact of coronavirus. The time was not ripe for any such meeting. The failure of OPEC-Plus meeting has led to a drop in the oil prices by ten percent, thus freeing its members from any future obligations, even though they, in theory, have to wait until the end of this month to complete their obligation of crude oil production cuts of 2.1 million barrels.
Frankly, the meeting should not have taken place in such a situation. There was a high demand from Saudi Arabia for further cuts by 1.5 million barrels to be shared between OPEC and Russia plus, and for non-OPEC members to shoulder production cuts of 500,000 barrels, totaling to 3.6 million barrels effective from April, and with Saudi Arabia, Kuwait and the United Arab Emirates sharing almost majority of the cuts. The opinion of Russia differed from that of Saudi Arabia.
Perhaps, the current phase is not the right time to call for huge cuts when the demand for oil is weak. This is because China, followed by the rest of the world, is fighting with the coronavirus, and the world economy is stagnant trying to cope with the situation.
In other words, the oil market is not ready, and it is better to wait or call for another meeting at another time. Russia is not hurt much by the collapse in oil price to reach $45 per barrel, as its economy can manage with such a level of oil price. Their economy is diversified and oil is not the sole source of income for the country, and it is not highly dependent on oil exports to China.
However, Saudi Arabia is the biggest supplier of oil to China, which is the biggest oil importer. The fall in demand and drop of four million barrels of oil have left a huge impact on Saudi Aramco’s supply, which has dropped by 50 percent. It is probably time for OPEC to let go and wait for the reaction of the oil markets; maybe the low oil prices may force or push USA shale oil to minimize its production.
However, this does not seem realistic under the current circumstances when the market is full of oil and the demand is barely around 500,000 barrels per day, which will be handled by non- OPEC producers. Or Saudi Arabia may take the full burden of oil cuts in order to force the oil price to improve. This will take a long time, especially when other oil suppliers would not be willing to cut or push more oils.
Once again, news reports were against such meeting, which has resulted in the collapse of oil prices, and the disagreement of Russia to partake in the production cuts. We have also been stating that Russia never participated effectively in any oil cuts or commit physically to any oil reduction.
The commitment was only in talks. Certainly, all of the OPEC countries will face huge financial deficits this year. Maybe it is time to knock on the doors of banks and financial houses to request for long-term loans. Oil price within the range of $60 per barrel is farfetched this year.
By Kamel Al-Harami Independent Oil Analyst