The oil market has had a month of significant recovery. Since the
historic cuts by Saudi Arabia and Russia took hold, and the US shale
industry began to contract, crude prices have jumped around 70 percent
and seem to have established a “floor” at $30 a barrel and a trading
range of around $35.
That is nowhere near enough for oil-producing states that count on
energy revenue to fund their budgets, but it is a move in the right
direction after the carnage of “Black Monday.” It shows that the oil
market can be at least partly regulated by supply actors, even in the
midst of the most savage demand destruction in history because of global
economic lockdowns.
The recovery was mainly due to signs that the energy-guzzling economies
of East Asia — principally China, Japan and South Korea — were resuming
economic activity at a faster-than-anticipated rate, and also the
realization that “tank top” — exhaustion of the world’s storage capacity
— was not going to happen.
The big storage facility at Cushing, Oklahoma, was never at serious risk
of breaching capacity, and demand for expensive floating storage is
declining.
There is still a lot that could go wrong like a serious second wave of
coronavirus or a complete rupture in trade relations between the US and
China but, barring these, the outlook for oil is better than you might
have reasonably expected a month ago. Analysts are looking at an average
of around $35 this year and perhaps more than $50 in 2021.
A lot is riding on the OPEC+ deal led by Saudi Arabia and Russia. This
will be the subject of talks at the OPEC meeting next month, when
participants will have to decide whether to reduce the level of cuts
from 23 percent to 18 percent of output. There is a considerable body of
opinion within the organization that the 23 percent level should be
adhered to for an extended period. Saudi Arabia has already gone even
further than that, with an extra one million barrels per day reduction,
backed by other Gulf producers.The other significant variable in the
OPEC equation is the level of compliance with the cuts. Russia, which
has long argued that big cuts were impossible for its oil business
because of geological and climatic reasons, appears to have found a way
around those challenges.
For Iraq, Nigeria and Libya, the financial situation is dire enough to
distract them from the precise terms of the OPEC+ deal and maybe tempt
them to sell as much as possible while prices hold.
But the big imponderable is in US shale. On all the indicators — well
shut-ins, fall in rig count, job losses and bankruptcies — the past
month has been savage, especially in the Texas heartland of the
industry, as the price of West Texas Intermediate fell through the
floor.
Rising prices change the economics again. Not many shale operators are
viable at $30, but as the price creeps upward it makes sense for them to
start thinking of pumping again. Upward of $40, there could be a
renewed surge in shale production.
This would drop a spanner in the works of the global industry. It would
make no sense at all for Saudi Arabia to continue with its
market-changing cuts, which are exacting a big price in terms of lost
revenue, if the US was swamping the world with oil again. The battle for
market share — with the Kingdom turning the pumps full throttle again —
would be back on.
We’re not there yet by any means. Much depends on whether President
Donald Trump’s administration adds the oil industry to its list of
sectors needing support in the big pandemic support package struggling
through Congress. The Democrats don’t like that idea but, in an election
year and with promises of environmental concessions by Big Oil, they
might be persuaded.
Even as the oil industry congratulates itself on its policy response to
the pandemic, it has to be aware that a new oil price war is just a few
dollars per barrel away.
• Frank Kane is an award-winning business journalist based in Dubai. Twitter: @frankkanedubai
Disclaimer: Views expressed by writers in this section are their own and do not necessarily reflect Arab News' point-of-view
No comments:
Post a Comment