With the most recent round of coronovirus-induced lockdowns in various parts of the world, OPEC may face the biggest challenge yet: Cut even more production. Will the cartel and its members survive such a decision?
OPEC originally planned to relax the current round of production cuts starting in January. And for now, the plan is still in place. But there has been discussion among OPEC members and analysts that it could speed up the plan, which could extend further cuts from January 2021 to some uncertain future date.
The reason for the possible expansion of the current round of cuts is OPEC’s outlook on oil demand, on which all plans — budgets, production plans, austerity measures — are in place.
And if there are any signs of future oil demand in the new round of lockouts in different parts of the world – and should they sometimes consider OPEC seriously considering the possibility that its plans to slacken production cuts will end must be given.
The current lockdowns are threatening the very fabric of the oil industry, and some oil and gas companies have not survived the final round of lockdowns and depressed demand. It is highly likely that more oil and gas companies will not bring it around.
Austria Starting 3 November Latest lockdown. Under the new orders, residents must remain at home between 8am and 6am by the end of November in a desperate attempt to arrest the spread of the virus. Hotels should be closed, and restaurants and cafes will be closed – all of this will profoundly affect oil demand. For Austria, most of its oil comes from Kazakhstan — an OPEC + member — while its gas comes from Russia.
Last week, France Implemented it Second lockdown Too, and this time it is expected to last until 1 December. Under these measures, people are only allowed to go to work, except to buy essential goods and attend medical appointments. One of the most notable restrictions here is that there is a restriction on travel between regions, and must remain within 1 kilometer of their homes – a rule that would surely eat up the oil demand of the nation that receives most of its oil Does Saudi arabia and norway. Related: Venezuela’s oil industry is on its last legs
Next on the list is Germany, which went into another lockdown on Monday. Germany has tight travel restrictions, and all non-potential travel is prohibited. according to this Energy Market Research Group AGEBGermany’s energy consumption is set to decline by 10% this year – especially for crude oil, according to AGEB, with Germany seeing a 3% drop. Germany’s largest oil supplier is Russia – the major leader of the plus share of OPEC +. With the UK lockdown starting on 5 November, the UK and Portugal are closing again.
With these lockdowns more likely to come, will it push oil demand to levels that will create a glut even more – and a headache for OPEC? And if so, will OPEC members be able to take another hit from the ugly combination of lower oil prices because of the glut in the budget, and the fewer barrels it can generate revenue from?
The answer is complicated. Most OPEC members are dependent on oil revenues – some entirely. And there are already rumors of unhappy members who have indicated from the record – of course, that they will not come on board January should knock OPEC and ask for an already painful quota extension that it is permanent today.
Those disgruntled countries that cut production as a duty should include Nigeria and Iraq.
OPEC and Russia – or more likely Saudi Arabia and Russia – favor the expansion of the cut. This week, he is said to be weighing the possibility of delaying his January plan to ease the cuts. The mere rumor of such an event caused oil prices to rise on Tuesday, but OPEC members are less enthusiastic.
Related: Oil prices soared on election day
The reasons for this are obvious. Efforts to diversify the economy are slow in OPEC member countries. Their budgets are inextricably linked with oil revenues, and on Tuesday the Energy Information Administration (EIA) predicted that OPEC members’ oil revenue would hit its lowest level in 18 years – both at low oil prices And the result of reduced production. The EIA said that collectively, OPEC members are set to earn $ 323 billion in net oil export revenue this year, compared to $ 595 billion last year.
Aramco reported a profit for Q3 on Tuesday, but it was down 45%. It is painful, yet Aramco declares that it was Dividend hold. This dividend is mostly going to the government – 98% of it actually – and the fact that the dividend is being held while the profits are 45% is a sure sign that Saudi Arabia’s budget is going to come to hell or high water Those revenues are required.
Finally, even though some countries feel more pain than they can bear, Saudi Arabia and Russia will pull the strings as usual. If both feel it is prudent to extend the current production cuts beyond January, the rest of OPEC will likely decline – no matter how painful it is.
By Julian Geiger for Oilprice.com
More top books from oilprice.com: