As 2019 came to a close, oil prices were under pressure from the continued surge of U.S. shale oil. Although OPEC and its partners had already cut production by more than 1 million barrels per day (BPD), U.S. oil production had grown by about 2 million BPD from early 2018 to late 2019.
While some are quick to credit soft demand with the assault on oil prices, the reality is that oil demand is still growing each year by over 1 million BPD. The real challenge for OPEC hasn’t been soft demand — it’s the continued onslaught of shale oil production.
Following a failed price war that started in 2014, OPEC’s strategy has been to prop up oil prices by cutting production. The cartel is now in a waiting game with U.S. shale producers, cutting production to keep prices propped up, while holding out for the slowdown of U.S. shale production. When that eventually happens, OPEC will be back in the driver’s seat — assuming it doesn’t take so long that electric vehicles (EVs) are by then cutting deeply into oil demand.
In December 2019, OPEC and Russia attempted to respond to sliding oil prices with new production cuts. Following its December meeting in Vienna, OPEC announced it would increase its production cuts by another 500,000 barrels per day (BPD).
That brought the total production cuts from OPEC and its allies to 1.7 million BPD. But then along came coronavirus, which is a black swan event. At the beginning of 2020, nobody had yet died from the virus. Now, the death total has surpassed that of the SARS virus that caused energy prices to slump in 2003.
China is aggressively attempting to contain the virus, and that is impacting the Chinese economy. (At least one economist is warning that the virus is going to paralyze China). As the world’s largest oil consumer, a slowdown in China’s economy suddenly has a real potential of impacting oil demand growth. Thus, OPEC now has to contend with U.S. shale oil growth and a short-term impact on demand.
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The dual-threat caused a 20 percent slide in oil prices from the beginning of the year to early February. Last week OPEC members met with Russia (among others) with the hope of announcing additional production cuts that might stabilize oil’s free fall. This time Russia refused.
As fellow Forbes contributor Ellen Wald pointed out, “Russia has its own reasons for keeping production at current levels—mostly because its oil companies and government need the revenue.”
OPEC had hoped to announced additional production cuts of 600,000 BPD, but with Russia’s refusal to participate, no action is anticipated before OPEC’s next meeting in March.
Meanwhile, the oil price free-fall could continue, if coronavirus continues to spread. At present, that looks likely. How far prices fall at this point will be a function of the spread of coronavirus and OPEC and Russia’s eventual response (or lack thereof).
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By Robert Rapier
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He is deluding himself when he says that US oil production had grown by about 2 million barrels a day (mbd) from early 2018 to late 2019.
US oil production is overstated by a minimum of 4.349 mbd because it includes natural gas liquids (NGLs) which come from natural gas wells as well as such gases as ethane, propane, butane and pentanes which may not qualify as crude oil and condensates in its crude oil count. These liquids are not sold as crude on the world market. In fact, major oil exchanges accept neither natural gas plant liquids nor lease condensates as satisfactory delivery for crude oil. And if major exchanges don’t accept them as crude oil, then they are not crude oil.
Moreover, Russia recently won an important concession from OPEC+ when it argued
successfully that its condensate production estimated at 237,000 barrels a day (b/d) should be deducted from its total production for the purpose of compliance with the production cuts as Russia doesn’t sell it as crude. The concession amounts to an acknowledgement by OPEC that condensates are not crude and therefore can’t be sold as crude. Condensates are overwhelmingly used for blending with heavier crude oil grades.
Deducting NGLs from US oil production gives a figure of 7.851 mbd for 2019, a far cry from the 12.2 mbd claimed by the EIA.
And with China virtually in quarantine and therefore closed to business and unable to receive crude oil shipments, any planned new cuts by OPEC+ or deepening of existing ones will be a total waste and futile with no effect whatsoever on oil prices and will only lead to a loss of market share.
Even if OPEC’s production plunges by 2.0 million barrels a day (mbd) on top of Libya’s virtual loss of its production amounting to 1.0 mbd, it will not stop the continued decline in global oil demand and prices as long as the coronavirus outbreak is still raging.
Russia is yet to be persuaded by the need for new cuts. Russia’s economy could live with oil prices at $40 or even less. There is another major reason why Russia is hesitant about new production cuts. Russian oil companies have long balked at continued production cuts, arguing that the cuts hinder their production expansion plans, while leading to a wasteful loss of market share. Still, the final decision rests with President Putin.
Once the outbreak has been contained, global oil demand and prices will recoup all their recent losses in no time.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London