In a World With Too Much Oil, OPEC+ Sweats Its Next Move
(Bloomberg) - The world is full of oil. In less than eight weeks, however, OPEC + will be adding even more barrels to the flood.
For many in the oil market, this is the wrong step. Increasingly, some members of the OPEC + coalition are also wondering whether the group should reconsider.
"We don't need any additional oil," said Marco Dunand, co-founder of Mercuria Energy Group, one of the world's largest commodity trading houses.
When OPEC + ceased production in May as the pandemic destroyed demand, it announced an aggressive three-phase plan. First the deepest reduction: almost 10 million barrels per day were withdrawn. Then easing the cuts to around 8 million barrels a day. A third phase is slated to begin in January when the cuts are slated to be reduced to just 6 million barrels.
But now OPEC + is debating how to proceed. The mood within the cartel is gloomy. The recovery in demand is slower than expected, and inventories are not shrinking as quickly as OPEC + expected a few months ago. Oil prices are also lower than many Member States had hoped.
"The fundamentals of the oil market look soft," said Martijn Rats, Morgan Stanley oil analyst.
The Saudi Arabian Energy Minister Prince Abdulaziz bin Salman and his Russian counterpart Alexander Novak are facing a difficult task. Because there is too much oil, some traders believe that OPEC may choose to delay the increase in production or spread it over several months to match the increase with seasonal consumption. "I don't think the market will see this in one fell swoop," said Mike Muller, head of Asia at the leading oil trading company Vitol Group.
Some OPEC + delegates are privately discussing whether the rejuvenation should be postponed by at least a few months to 2021. A short delay of maybe two or three months is a "realistic" possibility, said an OPEC delegate, asking not to be named as the discussions remain private.
Other delegates aren't so sure, hoping the oil market will pick up in early December. They point to signs, such as rapidly falling stocks on board ships offshore China, or signs that winter in the northern hemisphere may be colder than normal.
Election, civil war
Before the group gathers from November 30th to December 30th. 1, a lot could change. First, the US presidential election could change US foreign and energy policy in just over a month. Then there is Libya, where oil production is recovering after a ceasefire between warring factions. Finally, the course of the pandemic and the potential for a vaccine or treatment.
Delegates also examine evidence of the price of oil itself, which struggled to maintain $ 40 a barrel last month. The price difference between spot and forward oil contracts suggests an abundance of crude oil. The six-month price range for Brent, a key measure of market strength, is minus $ 2.18 a barrel, compared to minus 48 cents in June.
Saudi Arabia and Russia seem to agree for the time being on how to approach the problem. Both wait to see October and November play out before committing to a course of action, according to those familiar with their thinking. And both are keen to better meet current targets, especially with quota scammers like the United Arab Emirates and Iraq. Moscow and Riyadh agreed last month that the cartel must be "proactive and preventive," recommending that "participating countries should be ready to take further necessary action if necessary".
It would not be the first time OPEC + has decided to postpone its three-phase plan. The second stage of the curbs was initially due to begin in early July, but was delayed by a month. Russia and Saudi Arabia initially disagreed over the delay, but quickly found common ground. Many observers expect a similar situation this time around, with Saudi Arabia likely being louder than Russia. If history serves as a guide, Moscow and Riyadh will likely find a solution.
OPEC + observers, following the chatter in the cartel and trying to read between the lines for clues about future action, believe the debate is raging within the group. Few believe the matter has been resolved.
"OPEC + will want to learn more about the situation in Libya and the global recovery in demand before acting," said Amrita Sen, co-founder of consultant Energy Aspects Ltd. delay the transition to the third phase of the contract by three months. "
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