By Saad al-Kuwari
Since the failure of the Organisation of the Petroleum Exporting Countries (Opec) and Russia last month to agree to extend or deepen the production cut agreement with Opec Plus, a price war had gone off between Russia and Saudi Arabia, Opec’s leader.
It appears as if the United States of America’s and Russian coordination have begun a new global oil diplomacy course, outside the Opec, to contain the price war and calm the tense situation.
The Americans are intended at supporting the shale oil industry and weakening Opec’s role in controlling oil production levels and marginalising its role in the near future.
On the other hand, the Russians want to weaken the US shale industry.
The Opec has always been the subject of sharp criticism, and in the mid-seventies of the last century, it was accused of holding the world hostage, especially after reducing oil supplies and doubling its price three times in a short period.
It is worth mentioning here that the main tool Opec previously had was to control production levels, either by reducing them if they want to raise prices, or increase them if they want to reduce prices, at least to the extent that it does not lead to a price collapse. Thereby it was seeking to stabilise prices in the market in the interest of oil producers within Opec in the first place.
There is no doubt that Opec plays a big role in the market, as it produces more than 40% of the world’s crude oil, and this proportion was more than half in the beginning of the seventies. That said, the current rate itself represents a large share.
However, the remaining 60% also plays a big role, as there are two key oil-producing countries outside of Opec, namely the US and Russia.
Russia plays an important and prominent role through its role in Opec Plus, and as is known, Russian oil companies comply totally with the decisions of the Russian government, similar to other state oil companies.
The US is the largest producer of crude oil and shale oil now and oil (in the US) is produced through the private sector, which means its decisions are based on the principle of profit and loss.
American oil producers do not cooperate with Opec in controlling prices, because that would amount to violating the competition law in the US.
But something happened in the US during the last decade or so, which led to a change in this global industry, namely the rise of shale oil at cost prices considered competitive with some of the highly costly production of deep sea water conventional crude oil.
The US still needs to import oil continuously, although less oil than before, as it can now meet two-thirds of its needs from shale oil. Just over a decade ago, the US was able to meet only one-third of its needs. For this reason, the importation of oil decreased, and dropped dramatically.
Also, shale oil can adapt more quickly to fluctuations in the oil market, as it does not need large-scale investments like conventional oil and the investor can recover his money more quickly.
Therefore, shale oil production can be increased more quickly when prices start to go higher than the cost of production and it ranges between $45-40 per barrel.
And nowadays technology facilitates lower production costs, hence, the continuity of shale oil production in America.
Shale oil was one of the reasons behind the sharp drop in oil prices after mid-2014. Shale producers increased the supply beyond the needs of the consumer market to gain market share.
Oil markets and prices faced simultaneous pressures from the spread of the coronavirus epidemic, falling economic growth rates and global demand for oil, and from a price war between Saudi Arabia and Russia after Opec and other countries outside Opec, such as Russia, failed to agree to extend or deepen the cut to support oil prices.
Oil refineries in the world started to reduce the refining capacity in light of the dwindling oil demand and refined products around the world due to the outbreak of the Covid-19 pandemic and its repercussions on the global economy and oil consumption in China and worldwide market.
The US and the major industrialised countries are the biggest beneficiaries of the drop in oil prices in this period, as its strategic stocks have been increased and fuel prices supported.
For example, America’s import of oil increased to 1.5mn barrels per day, instead of 0.5mn per day.
The attention of the oil market watchers is directed to the meeting of the Opec and Russia, to discuss the production level in an effort to further support and balance crude prices and raise oil prices, which have deteriorated by 50% in recent weeks of increased supply.
And expectations indicate that the Opec and non-Opec producers will extend the production cut agreement to 2019 levels, in line with a drop of about 1.7-2.1mn barrels per day, and Saudi will bear the greatest burden in this reduction and extend it to work until the end of 2020.
It is very necessary to add new production cuts that reach at least 3-4mn until the end of 2020 to support the prices affected by the Covid-19 outbreak, and to adjust the balance of supply and demand and absorb the surplus in the oil markets.
And it will be conditional on the acceptance of Russia and other countries such as Mexico, Kazakhstan and Brazil, and also in one way or another to coordinate reduction of shale oil production from North America in order to participate in the biggest cut since the global financial crisis, some 12 years ago.
This is despite the competition law, as this is applicable internally and applied to protect local consumers.
In case of consensus, prices will rise in two stages to around $40- 45 as a first stage, and then another rise to $60 or higher in the event of a global economic recovery and the growth of demand for oil after the corona pandemic fades.
In the event that the meeting fails and no agreement is reached, the price of oil will drop to $20 or less, which will have negative effects on the entire oil market.
* Saad Abdulla al-Kuwari graduated in Chemical Engineering from Qatar University and obtained an MBA in Oil & Gas from Liverpool University. He was appointed CEO of Tasweeq in 2010. During his career, he has occupied several key positions in refining projects and processing, oil, gas and refined products, storage tanks and export terminals
operation. He also has considerable experience in the field of Gas Processing Operations. He was also manager of Gas, Oil Petrochemical Marketing in QP Marketing Directorate for several years.
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