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OPEC+ Resurrection Won’t Comfort An Oil Market Flirting With $10-20 Prices

In the short space of time that has lapsed since the collapse of OPEC+, the grouping of 14 Saudi-led oil producers within OPEC and 10 Russian-led non-OPEC exporters, oil futures have slumped to historical lows with Brent struggling to find a floor at $25 per barrel levels.

On March 5 – the eve of OPEC+ talks when OPEC had proposed a deepening of their existing cuts by 1.5 million barrels per day (bpd) – Brent closed at $49.99 per barrel. For much of the next morning after having played Russian roulette with OPEC, Moscow’s chief envoy and Oil Minister Alexander Novak announced a breakdown talks and declared all nations were “free to pump at will” from April 1.

Saudi Arabia duly obliged via exaggerated promises of upping its production to 12.3 million bpd, and offered some very real discounts of $4-8 per barrel on its official selling price (OSP) for April. So began an ‘oil price war’ with a macroeconomic sideshow of the coronavirus or Covid-19 outbreak that had prompted the original demand for production cuts anyway.

Now with the oil market in doldrums, chatter has resurfaced of resurrecting and even expanding OPEC+. Only problem for desperate backers of such a move is that events have largely overtaken OPEC+ with whole countries in lockdown feeling the impact of what is now a global coronavirus pandemic.

At the time of writing (March 27, 13:00 EDT), Brent is trading well below $25; a decline of over 51% on levels recorded on the eve of the OPEC+ meeting. That’s because, at present many fear a total collapse in near-term crude demand. Even projections of 20 million bpd in demand decline for 2020 – such as the ones put forward by the International Energy Agency (IEA) – are looking optimistic.

If the coronavirus outbreak had been confined to a regional epidemic instead of a global pandemic that it has morphed into, oil price declines would have seen benchmarks slip to the level of Saudi discounts and then gradually head lower (or higher) based on market oversupply permutations.

Instead, we are witnessing simultaneous oversupply and demand crises leading to a dramatic collapse in prices making a breach of $20 is a distinct possibility. So, from initial belligerence that Moscow could tolerate $8 per barrel oil prices and Riyadh would up production to 12.3 million bpd leaving no room for spare capacity, there is now chatter of reopening dialogues.

Meanwhile, whinging in U.S. political circles has ranged from describing the collapse of OPEC+ as economic warfare on its industry to pondering how American producers ought to collaborate with OPEC in cutting output. Given the scale of value destruction in the oil and gas sector stateside, the latter might happen anyway. Yet gentle nudges keep coming.

U.S. President Donald Trump has expressed his desire to get involved “at the appropriate time.” On Friday (March 27), Kirill Dmitriev, Head of Russia’s sovereign wealth fund and its co-negotiator with OPEC alongside Minister Novak, told Reuters: “We are in contact with Saudi Arabia and a number of other countries. Based on these contacts we see that if the number of OPEC+ members will increase and other countries will join there is a possibility of a joint agreement to balance oil markets.”

Suddenly not only is the prospect of resurrecting OPEC+ a possibility, but that the original number of participants could be expanded as well. Of course, Dmitriev is not Igor Sechin, Chief Executive Officer of Russian oil behemoth Rosneft, who is thought to be among President Vladimir Putin’s inner circle and the leading voice behind the end of production cuts.

But it does point to a needs-must approach from Russia as well. However, even if the is some sort of a crude kumbaya moment between producers to come together and cut, it will be a bit too little, too late.

You cut when you have some definitive assessment of the level of demand and a price floor to aim for. Both are in a flux. Oil futures seem destined for the $10-20 per barrel range from their current $20+ levels, and if demand for the first quarter of 2020 was pretty low, the second quarter’s might be even lower.

Brent front-month contract’s latest decline has created the steepest contango, i.e. expectation of future prices being higher than current prices, for over a decade. Spread on the Brent May contract to November’s lurking is above $10 per barrel in the latter’s favor, according ICE data.

It is a level the market has not seen since January 2009. Among other things, it suggests that many market participants have low expectations for 2020, and do not expect prices to strengthen around $40 until much later in the year.

All the while demand continues to slide with airlines grounded, hotels shuttered, factories silenced and shops closed. If Brent hits the $10s, expect OPEC+ producers and some new pals scurrying back to the negotiating table. But it will be at a time when market influence and events are largely beyond their control.
Source: Forbes

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