Saudi-led global efforts push ahead towards stabilising oil markets
DUBAI - Current president of the G20 and de facto leader of OPEC — the Organisation of the Petroleum Exporting Countries — Saudi Arabia was at the forefront of global efforts in recent days to stabilise oil markets.
After hosting world leaders for a G20 virtual summit in March, Riyadh hosted another virtual meeting of the G20, April 10 – a meeting held in extraordinary circumstances and the first time G20 energy ministers had convened specifically on a global energy agenda.
A day earlier, crunch talks between Saudi-led OPEC, Russia and a number of key non-OPEC producers resulted in a framework agreement featuring record-breaking cuts of 10 million barrels per day. That OPEC+ agreement was hanging by a thread as Mexico withheld its consent but Washington pressed to rescue the deal at the G20 meeting the next day. Held up on technicalities, the communique at the end of the G20 virtual meeting could not formally announce the deal.
Mexico’s dithering was unexpected but the success of the OPEC+ framework agreement was always going to hinge on the direct participation or strong tacit support of non-OPEC+ producers such as the US, Canada and Norway to ultimately achieve curbs of 15 million barrels per day or more. Efforts underway aim to conclude the deal in time for the opening of global commodity markets.
Oil prices were bouncing higher on speculation that OPEC+ talks would result in a deal to curb output. In the lead-up to that, key oil producers had been engaged in direct talks to find a breakthrough, as motivation had grown to restore cooperation and long-term stability to oil markets.
There was broad anticipation that an agreement to curb output between 10 to 20 million barrels per day was on the cards but also a risk that efforts could unravel again at the last minute.
Even with major oil producers in OPEC+ agreeing in principle to production cuts at an unprecedented scale, differences persisted earlier over what the baseline for those reductions would be and over what timeline those cuts would need to be implemented. There are also questions around how producers such as the US will formally lend their weight to stabilisation efforts.
Agreements to limit oil production are notoriously challenging in the OPEC context – in the OPEC+ scenario, it has become more protracted than ever because of American shale oil. The US, whose shale oil industry has been flourishing in the past two years but was hit especially hard in recent weeks, has become a major party to oil markets.
American shale oil is what has effectively driven record oil production but with flagging demand, even global oil storage facilities were filling up as the oil market headed into a crisis.
The White House had considered an import tax to defend American producers, which have the highest costs of production anywhere, if oil prices did not recover soon. US oil producers themselves had been divided over whether to join global supply cuts but their strongly expected participation to rationalise oil supply now is a game-changer.
US President Donald Trump had been pushing hard for OPEC+ to agree on supply cuts but did not explicitly put American cuts on the table beforehand. US oil production has been falling since reaching the near record levels of 13 million barrels a day but forecasts anticipate production to fall below 10 million barrels a day as American exploration and production companies continue to slash spending.
Oil producers have been engaged in a price war since the cooperation between OPEC+ collapsed in March, just as the economic impact of the coronavirus was taking hold – making Q1 of 2020 the worst quarter in history for oil as prices fell by as much as two thirds. Challenges have been compounded by demand destruction caused by the coronavirus pandemic – global demand for oil is normally around 100 million barrels a day but estimates have put current consumption down by as much as a third.
This latest breakthrough could now place oil on a pathway back towards $40 a barrel in the next few weeks and mark the start of a new era of cooperation between oil producers. Together with Washington, Saudi Arabia will shortly laud this deal and its own instrumental role in breaking a deadlock that should support a faster global economic recovery.