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Record oil production cuts that OPEC + initiated in response to demand and the collapse of the oil price have helped stabilize the oil market in recent months.
However, oil prices have been stuck in the low $ 40s since the end of the second quarter. While this is a huge improvement, double the April lows, oil at $ 40 is roughly half the price of oil that many OPEC members, including top producer and de facto leader, Saudi Arabia, They need to balance their budgets.
OPEC and its key non-OPEC partner Russia need oil prices above $ 40 to support their oil-dependent economies, which have been hit by the pandemic-driven slowdown.
However, prices have stubbornly stayed in a tight range since June, after signs began to emerge that global oil demand, while improving, is not recovering fast enough to justify higher prices.
At the same time, OPEC + is easing its production cuts and has even (if ever) succeeded in getting all participating producers to perfectly comply with their quotas.
This increase in supply and the faltering recovery in demand are tipping the market into oversupply, as suggested by weak physical markets and the growing contango structure in the oil futures market.
Once again, OPEC is caught between a rock and a hard place.
Should OPEC stay the course with the cuts, hoping that the recovery in demand will pick up next year, enduring low oil prices for longer than crushing OPEC budgets? Related: The Nine Key Points in Biden’s Energy Strategy
Or should it modify its production strategy again to produce less as the pandemic continues to depress mobility and economic activity in major oil-consuming nations, thereby sacrificing longer-term market share in the name of boosting oil prices? short-term oil?
Ideally, OPEC + should seek to balance higher prices in the short term with greater market share in the long term, writes Robin Mills, CEO of energy consultancy Qamar Energy and author of The Myth of the Oil Crisis, in The National .
Escape strategy
Such a balancing act is easier said than done. Current prices are well below the comfort level for any of the oil producers in the deal. But a return to deeper cuts to help the market rebalance faster and reverse the bearish sentiment of recent weeks would mean a further loss of market share, potentially pushing prices up to levels where US shale would restore more volumes. of production.
Of course, this time OPEC + has come up with a medium-term exit strategy until April 2022. The current cuts of 7.7 million bpd, reduced from 9.7 million bpd, will be further reduced from January from 2021 to 5.8 million bpd, to remain in effect until the end of April 2022.
With evidence accumulating to suggest that the recovery in demand has stalled and that demand for all types of fuels, especially jet fuel, will likely not return to pre-crisis levels until 2023, there is mounting speculation on whether or not OPEC + may need to review its attempt to help the elusive rebalancing of the market and, consequently, prop up prices.
$ 40 of oil too low for OPEC +
The most convincing argument in favor of the strategy of deeper cuts could be the fact that all OPEC + economies, from Saudi Arabia and Kuwait to Russia and Kazakhstan, suffer from the current low oil prices.
Saudi Arabia saw its second-quarter deficit at $ 29 billion due to continued falling oil prices and demand for oil. It has tripled its value-added tax (VAT) and suspended cost-of-living allowances as part of a new round of painful austerity measures to save its finances. The budget savings of US $ 26.6 billion (R $ 100 billion) also included the Kingdom’s cancellation, extension, or postponement of some capital and operating expenses for some government agencies, as well as reduced provisions for various programs and projects. important this year. Kuwait is running out of money for civil servants’ salaries and will have no money to cover them after November unless oil prices improve substantially. Russian President Vladimir Putin prefers prices above $ 46 a barrel. Related: Traffic Levels in Europe and Asia Close to Pre-COVID Levels
There is no doubt that the OPEC + pact participants need oil prices significantly above $ 40.
But they will need positive news from the demand side to accelerate the market rebalancing. These days, there is no positive news for demand, and the market reacted with Brent crude falling below $ 40 a barrel this week for the first time since June.
But long-term market share could be more important
Although the market bulls (and OPEC + budgets) desperately need a market rebalancing sooner rather than later, Saudi Arabia is reportedly sticking to production cuts as they are despite the recent drop in the price of oil. oil, the Financial times reported Wednesday, citing five sources who had reported on the Kingdom’s plans. While this week’s price drop is causing concern, but not panic, in Saudi Arabia, the OPEC leader sees no need for deeper cuts, fearing losing market share to other producers, FT sources said. .
Market share is firmly on OPEC +’s mind, judging from comments this week by Russia’s Energy Minister Alexander Novak, who said that “it will be extremely important for Russia, and other oil producers, to recover their market share as soon as possible, and even increase it, when demand returns to pre-crisis levels. “
OPEC has been betting on US shale reaching its peak in the 2020s to regain market share, but the pandemic and the push for low-carbon energy have the cartel concerned that the crisis has accelerated significantly the schedule of peak oil demand.
However, this focus on market share may mean that OPEC + will have to give up budget revenue in the short term, forcing them to take on much more debt, intensify austerity, and take more deep advantage of sovereign wealth funds to cover losses. budget deficits.
With the oil market rebalancing lagged with a slower recovery in demand, OPEC faces the same old dilemma: will short-term pain lead to long-term gains?
By Tsvetana Paraskova for Oil.eu
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