Introduction
My last column addressed the impact of the incipient 2020 global inflation and its accompanying economic recession on the one hand, and, on the other, the COVID-19 pandemic, on the global demand and supply for crude oil. The forces driving the demand and supply had conflated during the first quarter of 2020, leading to significant cuts in: 1) the demand for petroleum products; 2) capital expenditure on new capacity- production and exploration; along with 3) a collapse of crude oil prices. In today’s column, I continue to evaluate how all these occurrences are likely to impact Guyana’s crude oil earnings obtained for its infant oil and gas industry.
Sad to report, despite this bleak economic outlook embedded in the present situation, during the first quarter, March 8, Saudi Arabia was cited as the initiator of what the United States President Trump has publicly rebuked as a “crazy oil price war”. The attribution of responsibility to Saudi Arabia for initiating the oil price war is pretty common in the mainstream media. Thus, CNN has headlined its reporting this way: Oil crashes by most since 1991 as Saudi Arabia Stuns World with Massive Discounts. And, National Public Radio (NPR) headlined its report this way: Oil Prices, Stocks Plunge after Saudi Arabia Stuns World with Massive Discounts.
Today’s column seeks to explore the potential direct impact of the “crazy oil price war” on the global petroleum industry and the indirect effects on the crude oil price received by Guyana’s infant oil and gas sector.
The Proximate Details
By March 8, 2020, it was already realized that crude oil prices had fallen by as much as 30% when compared to prices prevailing at the end of 2019. However, the “crazy” oil price war was declared on the same day, and immediately thereafter crude oil prices collapsed further for USA shale and Brent crude by as much as 34% and 24%, respectively. The trigger event was the collapse of the dialogue between OPEC and Russia on the continuation of their alliance to pursue negotiated crude oil production cuts aimed at protecting jointly agreed price levels considered by OPEC and its non-OPEC partners to be commercially as well as fiscally sustainable for all parties to the agreement.
As expected, the collapse of global crude oil prices immediately spilled over into a collapse of stocks and other financial markets worldwide. This spillover generated acute market volatility over wide areas, including such sectors as other commodities, transport and manufacturing. And, in turn, this produced not only broad uncertainty but also reinforced economic recession sentiments, behaviours, and, in some instances, even worse. I have reported on this aspect of the 2020 general crisis recently and, therefore, I shall not repeat here.
Of note: Within a month, as this column is being prepared, the “crazy oil price war” has been called off!
Background
There is widespread consensus among energy analysts that by 2014 US shale oil production, alongside other countries continuing their crude oil production, had led to a substantial global oversupply of crude oil production relative to its global demand. The consequence was a precipitous price fall in these prices, from around US$114 per barrel in 2014 to US$27 in 2016. The decline averaged about 80%. It was in this context that OPEC and its allies teamed up with Russia, as OPEC+, to regulate global crude oil supply. Production cuts were negotiated among them, with the United States, a truly significant oil producer, excluded from the arrangement.
The sudden and severe impact of the COVID-19 pandemic on the early 2020 global demand for petroleum products, oil investors’ ability to spend on production and exploration and, above all, on crude oil prices impelled urgent efforts to extend the cooperation referred to above. OPEC+ was reconvened. Saudi Arabia had by then cut its oil output by 2.1 million barrels per day. Energy analysts were projecting in mid-January that 2020 would witness its lowest rate of oil demand growth since 2011. The projected decline ranged from 325,000 to 825,000 barrels per day.
At the OPEC-convened March 5, 2020 Summit, Saudi Arabia proposed that it cuts its own supply by a further 1.5 million barrels a day through the second quarter of 2020. Other countries would then maintain their ongoing commitments. Russia refused. And, Saudi Arabia responded to this refusal by offering deep discounts, of between US$6 – 8 on each barrel of its crude oil.
Analysis
Several preliminary observations are to be noted. First, both Russia and Saudi Arabia have declared consistently that they were definitely not in pursuit of an intentional oil price war. Neither admitted seeking to retaliate against the other. Indeed, Russia had argued that it is far too early to properly assess the impact of the COVID-19 outbreak on energy demand broadly, let alone crude oil specifically. It wanted greater market understanding before taking prescriptive action, given the absence of data on the duration and severity of a pandemic driven impact on demand. Russia also argued wider global developments needed to be factored in to the analysis; for example, the emergence of the Guyana offshore sector, and political conflict disrupting supplies in long established producers like Libya. In these circumstances, the true bottom of the expected market drop is not known so decisions on cuts cannot be efficient.
Second, with an already battered crude oil market, response to the crazy oil price war saw prices fall further—Brent by 20% and West Texas intermediate (WTI) by 24%.
Third, on April 12 the 10th OPEC and non-OPEC Ministerial meeting was convened via videoconferencing, under the joint Chairmanship of Saudi Arabia and Russia. The Committee met and ended the “crazy oil price war.” More importantly, though, the Committee arrived at far reaching decisions well beyond the expectations of most industry commentators.
Conclusion
Space remaining in this column is not enough to report adequately, let alone evaluate, the ending of “the crazy oil price war.” I should advise readers upfront that the OPEC+ Agreement arrived at a week ago has been both praised for its far-reaching scope as well as criticized for its limited production cuts!