OPEC + has cut record oil production due to falling demand and the price of oil, which has helped the oil market to stabilize in recent months.
Still, oil prices have stuck in the low $ 40s since the end of the second quarter. While this is a major improvement – twice the lows seen in April – $ 40 oil is nearly half of the oil price that many OPEC members, including top producer and de facto leader, Saudi Arabia, need to balance their budgets is.
OPEC and its major non-OPEC partner Russia need more than $ 40 in oil prices to support their oil-dependent economies, which have taken a hit from the epidemic-driven recession.
However, prices have fallen in a narrow range since June, following signs that global oil demand – albeit on loan – is not recovering quickly to warrant higher prices.
At the same time, OPEC + is reducing its production cuts and yet (if ever) brings all participating producers into full compliance with their quota.
This increased supply and staggering demand reforms is now causing a wave of overspeaking in the market, due to the weak market and widening of the Contestanto structure in the oil futures market.
OPEC is once again caught between a rock and a hard place.
Should OPEC stay on the course with the cuts, which it hopes will increase demand for recovery next year to lower oil prices that lower the OPEC budget? Related: Nine Key Points in Bid’s Energy Strategy
Or should it reduce its production strategy again as the epidemic continues to suppress mobility and economic activity in oil-consuming countries, thus sacrificing long-term market share in the name of raising oil prices in the short term The
Ideally, OPEC + should be looking to balance high short-term prices with high long-term market share, writes Robin Mills, chief executive of energy consultant Qamar Energy and author of The Myth of the Oil Crisis, in The National .
Such a balance makes it easier to work. The current prices for any of the oil producers in the agreement are well below the comfort level. But a deep-cut return to help accelerate market imbalances and the recessionary sentiment of recent weeks will lead to an additional loss of market share, potentially pushing prices to levels at which US shale is more Will restore production versions.
Granted, this time OPEC + has planned a medium-term exit strategy by April 2022. The current reduction of 7.7 million bpd, lower than 9.7 million bpd, is set to more easily remain at 5.8 million bhp from January 2021. Effect by the end of April 2022.
With the pile of evidence suggesting that recovery has stalled and demand for all types of fuels, especially jet fuel, will likely not return to pre-crisis levels by 2023, there is growing speculation Whether OPEC + may require its revisit or not. Deal to help rebalance the elusive market and, consequently, raise prices.
$ 40 oil too low for OPEC +
The most compelling argument in favor of a deep-cut strategy may be the fact that all OPEC + economies from Saudi Arabia and Kuwait to Russia and Kazakhstan are suffering from the current low oil prices.
Saudi Arabia saw its Q2 deficit at US $ 29 billion due to a steady decline in oil prices and oil demand. It has tripled its value-added tax (VAT) and suspended living allowances as part of a new round of painful austerity to save its finances. Budget savings of US $ 26.6 billion (100 billion Saudi riyals) include the Kingdom canceling, increasing or postponing certain operating and capital expenditures for certain government agencies, as well as reducing provisions for several programs and major projects this year Was also involved. Kuwait is running out of money for salaries of public servants and after November there will be no money to cover these until oil prices improve. Russian President Vladimir Putin prefers a price in excess of $ 46 per barrel. Related: Traffic levels in Europe and Asia near pre-covid levels
There is no doubt that OPEC + treaty participants need more than $ 40 in oil prices.
But they will need positive news from the demand side to accelerate the market. These days, there is no positive news for demand, and the market reacted with Brent crude this week for the first time since June, down from $ 40 a barrel.
But long-term market share may be more important
Although market bulls (and the OPEC + budget) need a market imbalance sooner rather than later, Saudi Arabia is reportedly cutting production, as has been the recent oil price spike, financial Times Reported on Wednesday, quoting five sources, it gave information about the state’s plans. However, this week’s price crash is causing concern – but not panic in Saudi Arabia, OPEC leader doesn’t need to cut deep, fearing it will lose market share to other producers, sources in FT said .
Market share is firmly in OPEC +’s mind, given the comments this week by Russia’s Energy Minister Alexander Novak, who said that “it will be very important for Russia and for other oil producers to get their market as soon as possible” Take a stake in. ” And can still increase when demand returns to pre-crisis levels. ”
OPEC is banking on the US shelling peak in the 2020s to gain market share, but the epidemic and the move towards low-carbon energy have worried the cartel that the crisis has accelerated peak oil demand.
However, a focus on market share could mean that OPEC + will have to deliver more revenue from the budget in the short term, allowing them to take on a lot of debt, undertake tough austerity and overcome budget constraints in the sovereign wealth fund Will have to tap deeper.
With the decline in the oil market coupled with slowing demand, OPEC is facing the same old dilemma – will short-term pain deliver long-term benefits?
By Tsvetana Paraskova for oilprice.com
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