Introduction
As revealed in last week’s column, thankfully the “crazy” oil price war has lasted for about one month. It could have been still ongoing, but mercifully for Guyana, on April 12, the OPEC and non-0PEC Ministerial Meeting convened under the joint Chairmanship of Saudi Arabia and Russia arrived at the following agreements: First, the membership reaffirmed one of its foundational principles. That is, they re-committed to their continued participation under OPEC’s Declaration of Cooperation, DOC. The DOC requires: 1) the maintenance of stable petroleum markets worldwide; 2) the protection of the mutual interest of producing members; 3) the promotion of economic efficiency and secure supplies for consumers; as well as 4) preserving a fair return to invested capital.
Second, consequent to this re-affirmation, the Meeting set out details of the adjustments or production cuts members subscribe to, going forward. These adjustments require: first, an overall production cut in crude oil output of 9.7 million barrels per day (bpd), commencing May 1.This lasts for an initial period of two months – to June 30, 2020. Second, the adjustments/cuts for the next period, July 1 to December 31, total 7.7 million bpd. Third, for the next 16 months, January 1, 2021 to April 30, 2022, the production cuts total 5.8 million bpd.
The baseline that was used in these calculations is each member’s output for October 2018, with two exceptions – Saudi Arabia and Russia. For these two members that co-chaired the Meeting, the baseline is fixed at 11 million bpd. The members also agreed to review the possible extension of the Agreement in December 2021
Also notable is that explicit note was taken of the contribution of the G20, which had convened during the same period at an Extraordinary Energy Ministers Meeting.
To quote the OPEC Press Release, it “acknowledged the Importance of international cooperation in ensuring the resilience of energy systems.” Further the Meeting called on all the world’s major producers “to provide commensurate and timely contributions to the effort at stabilizing markets”.
Reminder
At this juncture, readers are reminded that my discussions in today’s and last week’s column have had as their primary purpose the demonstration of how the crazy oil price war might impact on Guyana’s infant oil and gas sector; the war itself being one of the previously indicated features of the 2020 general crisis. Thus far, my analysis has suggested that, based on the aspects of the general crisis, which I have covered to this point, three variables are key to the outcome. These are 1) projected severity [speed and depth of crude oil price and demand declines] 2) duration [timelines], and 3) revealed post-crisis willingness [propensity] to spend on both consumer goods and services as well as capital stock. For the last item there are no past similar experiences to draw on.
To recall, the two aspects of the 2020 general crisis that were previously considered are: 1) the inflation, trade down-turn, and economic recession forecasted for 2020 back in 2019; and 2) the COVID-19 pandemic and its accompanying economic shutdown. The reminder is, therefore, designed to inform readers that I am not concerned with offering a detailed analysis of OPEC, or for that matter the global oil market per se. The focus is on the impact the crazy oil war might have on the three variables cited above. In any event, such matters were earlier addressed in Volume 3, 2016/2017, of this extended series of columns on Guyana’s extractive sector.
Analysis
Several conclusions can be safely made at this point of time. First, the conventional judgement of most expert industry analysts has been very favourable to the outcome of the OPEC+ Meeting. Thus, Bloomberg has described the Agreement as,” the world’s top oil producers pulled off a historic deal”. And, Citigroup has labelled the outcome “unprecedented”. Indeed, Saudi Arabia, which co-chaired the Meeting has boasted, “we have demonstrated that OPEC+ is up and alive”
While the above praise has been heaped on the OPEC Agreement, analysts have simultaneously introduced some important cautions. One of these is fear that the window of time created between now and the start date for production cuts, May 1, could engender destabilizing speculation, greater uncertainty, and increased volatility in crude oil markets. These are real risks given the existence of a crude oil glut and exhausted storage facilities. Another caution is that while the proposed production cuts are substantial, they may not be enough if the negative Covid-19 impact on crude oil demand exceeds expectations in a dramatic manner.
Dramatically, on April 20, 2020, the US crude oil market suffered its worst one-day collapse. The US price for future contracts to be delivered in May turned negative. Brent crude also fell below US$20 – the lowest in 18 years.
Second, the United States Energy Information Administration, US, EIA in its most recent Short-Term Energy Outlook, STEO, April 7 2020, has projected the average crude oil price for 2020 at US$32 per barrel. Significantly, this is one-half the price obtained in 2019, US$64. Further, the projection for 2021 is US$46. The US, EIA data cited here although published less than a fortnight ago appeared before the crazy oil price war had ended. Its estimation is, therefore, more likely to err in the direction of a deteriorating crude oil market and lower prices. Of note the March 2020 Brent crude price averaged US $32 and for February, which was the lowest monthly price since 2016 at US$24. The projected price for Q2, 2020 is US$23.
Third, while the energy demand per unit of GDP is incomparably higher in the world’s two largest economies, the USA and China, than Guyana, we know from reporting on these countries the severe economic toll the 2020 general crisis has already inflicted. Thus, China’s GDP fell by minus 6.8 percent in the first quarter of 2020. The decline in the USA’S GDP is not yet final but its unemployment claims now stand at 26 million! These data are the worst for both countries in many decades. They do not therefore bode well for Guyana.
Conclusion
The evolution of the rapidly changing US oil and gas sector is a decisive feature of the 2020 general crisis. I introduce this topic in my next column to wrap-up this prelude to assessing the impact of the 2020 general crisis on Guyana’s infant oil and gas sector.
