Oil kingpins Saudi Arabia and Russia insisted Wednesday that OPEC members and their allies must respect production cuts agreed to stabilise the market.
The coronavirus pandemic slammed the global economy earlier this year, plunging oil prices into unprecedented negative territory before top exporters Saudi Arabia and Russia agreed to put aside their differences and make common cause to halt the slide.
Russia and Saudi-Arabia hail encouraging signs
Ahead of a virtual meeting of OPEC and non-OPEC producers to review the situation, Saudi Oil Minister Abdulaziz bin Salman and his Russian counterpart Alexander Novak hailed what they said were “encouraging” signs of recovering demand.
At the same time, Novak cautioned about the fragility of the market and uncertainties over the outlook even though, up to July, the 13 OPEC members plus the 10 non-OPEC producers had by July implemented 95 percent of the cuts agreed.
The Saudi oil minister says there's been 'a significant improvement in the fundamentals' of the global oil market over the past few months #OOTT
— Helen Robertson (@HelenCRobertson) August 19, 2020
“But we cannot stop there, we have to ensure the total respect of the OPEC+ accord,” he said.
Significant improvement for oil producers
“Over the past three months, there has been a significant improvement in the fundamentals of the global oil markets,” said the Saudi energy minister, who is half brother to de facto Saudi ruler, Crown Prince Mohammed bin Salman.
“We see encouraging signs that energy demand is recovering, as economies continue to re-open in many parts of the globe,” he said in opening remarks to the meeting.
Beginning in 2014, U.S. shale oil production increased its market share; as other producers continued producing oil, prices crashed from above $114 per barrel in 2014 to about $27 in 2016. In September 2016, Saudi Arabia and Russia agreed to cooperate in managing the price of oil, creating an informal alliance of OPEC and non-OPEC producers that was dubbed “OPEC+.” By January 2020, OPEC+ had cut oil production by 2.1 million barrels per day (bpd), with Saudi Arabia making the largest reductions in production.
COVID disrupted global demand
As a result of the COVID-19 pandemic, factory output and transportation demand fell, bringing overall demand for oil down as well, and causing oil prices to fall. On 15 February 2020, the International Energy Agency forecasted that demand growth would fall to the lowest rate since 2011, with full-year growth falling by 325,000 barrels per day to 825,000 barrels per day, and a first quarter contraction in consumption by 435,000 barrels per day.
Although demand for oil was falling globally, a drop in demand in China’s markets, the largest since 2008, triggered an OPEC summit in Vienna on 5 March 2020. At the summit, OPEC agreed to cut oil production by an additional 1.5 million barrels per day through the second quarter of the year (a total production cut of 3.6 million bpd from the original 2016 agreement), with the group expected to review the policy on 9 June during their next meeting. OPEC called on Russia and other non-OPEC members of OPEC+ to abide by the OPEC decision.
Pavel Sorokin from the Russian Ministry of Energy doubted that the cuts would work with stating following quotes: “We cannot fight a falling demand situation when there is no clarity about where the bottom is.”
“It is very easy to get caught in a circle when, by cutting once, you get into an even… worse situation in say two weeks: oil prices would shortly bounce back before falling again as demand continued to fall.” when asked in interviews. More reports confirm the Russian side made a proposal to extend the current OPEC+ combined cuts of 1.7 million barrels per day for at least 3 months, in order to assess the real impact the coronavirus crisis has on oil demand before more cuts, with OPEC refusing ultimately.
On 6 March 2020, Russia rejected the demand, marking the end of the unofficial partnership, with oil prices falling 10% after the announcement.
Earlier in February 2020, the Trump administration had put sanctions on Russia’s largest oil company Rosneft. Russia may have seen the oil war as a way to retaliate against U.S. sanctions, some media outlets claim.
“But work still needs to be done and I urge you all not to relax the efforts of the past three months.”
Analysts said they expect little change at the meeting, with producers wanting to keep the cuts in place to support the market after having gone through a devastating price war in March between Saudi Arabia and Russia as the coronavirus pandemic deepened.
Paola Rodriguez Masiu, analyst with the Rystad energy group, said “few surprises are expected today.”
AFP with additional input by GVS News Desk