On April 20, oil prices crashed to an unprecedented level, going into negative territory for the first time in US history. To understand the reasons for this sudden collapse and its geopolitical implications, Wikistrat asked three top energy experts for their brief analysis of this issue.
Dr. Tom O’Donnell - GlobalBarrel.com.
Senior energy and geopolitical analyst at the Hertie School of Governance, Berlin.
The historic drop of West Texas International prices into a negative range at close of market on 20 April is but a harbinger of a further gathering of momentum to a regime of “ultra-low for longer” global oil market prices. Three key takeaways are these:
This slow but inexorable, chaotic death spiral of the global oil market did not need to be either as chaotic or as precipitously deep as it will surely be.
The initial, collective, international market reaction was a responsible and intelligent one. All members of OPEC+, with the exception of Russia, voted on 6 March in Vienna to sharply cut OPEC+ oil output in the face of the gathering coronavirus demand-destruction storm. However, this coordinated response was wrecked. Full of hubris, Igor Sechin, head of Rosneft, on behalf of Moscow, declared Russia would not cooperate but rather take full advantage of the corona oil crisis. Moscow refused to cut, and energy minister Novak even declared he would reinstate cuts previously agreed to with OPEC+. Sechin made it clear that the target was the destruction of US shale production sufficiently to force Washington to grant sanctions relief, especially sanctions that had blocked construction of the Russian-German North Stream 2 pipeline.
This Russian declaration of a price war was a major and catastrophic miscalculation by Putin and Sechin
This Russian declaration of a price war was a major and catastrophic miscalculation by Putin and Sechin, who seriously underestimated the real severity of the coronavirus pandemic and the depth of oil-demand destruction it would inexorably bring in the coming days, overwhelming, too, Russian oil production; and the prodigious capacity of the Saudi’s – undoubtedly with the full agreement of its Washington allies – to counter-attack against this Russian-declared price war in such a way as to dramatically undermine Russian oil sales in both its key Western European and East Asian markets.
Demand destruction, by the coronavirus hit on economies, has dramatically destroyed demand to the tune of likely about 30 million barrels per day, roughly 30% of global pre-coronavirus production.
Global storage is fast filling up. Perhaps two to three or four weeks remain for storage to be filled in this, then that region of the globe. At that point, whatever wells that needed to be shut will surely be shut. However, the lack of a coordinated plan by OPEC+ and US producers, starting from 6 March, to begin cutting production, plus the huge amounts of oil Saudi Arabia has since produced and marketed to both end the Russian price war and continue to savage Russian market share in retaliation, have meant that the collision of overproduction with underconsumption, of a big over-supply shock with a mammoth demand-loss shock, will be much more catastrophic and chaotic than it needed to have been.
In the USA, Trump is too dithering and purposefully avoiding taking any decisive action to begin shutting in wells in a coordinated and less-damaging manner for both the physical wells and the tens-of-thousands of workers and the companies involved.
He faces opposite demands for actions from, on the one hand, the very numerous, smaller independent producers in West Texas, Oklahoma, North Dakota, Colorado, and such, as opposed to the interests of the larger international oil companies (IOCs). The former generally demand two things: (i) “pro-rationing” or production controls to be mandated by state entities, such as the Texas Railroad Commission, and the federal government – where Trump can declare a national security emergency to lift legal restraints on coordinated production control by producers; and (ii) federal oil import tariffs. The latter, the IOCs and some of the biggest and more profitable independents oppose both these measures.
All in all – this could have gone differently.
Trump, together with OPEC+, with the Russians and Saudis, could have called for meetings of, for example, the International Energy Forum, which jointly represents producing and consuming states, to discuss orderly and coordinated cuts to mitigate as far as possible the sort of chaos and both resource and economic destruction we will see in the coming weeks and months. This, or a similar gathering, could be accomplished at any time; but Trump, in particular, will dither, as with his coronavirus public health response, and the crisis will only deepen.
Dr. Li-Chen Sim, assistant professor at Zayed University (UAE).
Expert on the political economy of energy in the Gulf.
Oil prices dropping even with the conclusion of the new OPEC+ agreement last week is not a surprise. This is a reflection of:
Continued demand destruction due to worldwide COVID-19 lockdowns still ongoing
Uncertainty about compliance levels with regard to the new production levels
The time lag between falling oil counts and production cuts by US shale producers
Limited storage facilities for excess oil supply.
Oil prices dropping even with the conclusion of the new OPEC+ agreement last week, is not a surprise...What is noteworthy is that the WTI benchmark for US crude oil has fallen much further and faster than the Brent crude benchmark.
What is noteworthy is that the WTI benchmark for US crude oil has fallen much further and faster than the Brent crude benchmark. The latter informs pricing for two-thirds of internationally traded oil, including Middle East oil, whereas price movements in WTI generally reflect specific US or North American market conditions. Consequently, Gulf oil exporters should not be overly alarmed with WTI price falls, per se, impacting Brent crude levels, since points 3 and 4 above are relatively more significant for US shale producers. For Gulf producers, the start of the new OPEC+ agreement in May should mitigate (but not eliminate) the sharp fall in Brent – and Middle East – oil prices.
Homayoun Falakshahi Oil and Gas Equity Analyst, KPLER.
Yesterday was a dramatic day in oil markets and will be remembered in history. Quickly going through the technicalities of why US oil prices turned negative and finished at minus $37/bbl, that price is for contracts that expire today, meaning that any holder/seller will need to be physically involved in deliveries of oil in May. As that contract was specifically for deliveries at a certain geographic point (to Cushing, Oklahoma, where storage space is limited), this explained the hard sell-off. Therefore, even though this event was historical, its importance on oil markets in the medium term is relatively limited. We now need to watch what is happening on the June traded contract. It is possible that it will suffer the same fate.
Even though its significance is high but not as high as we could imagine, this latest event could have major impacts on geopolitics. In the US, though low prices are good for the consumer, prices have got so low that they will risk putting production from US shale producers at-risk, which in turn will slow down or shut down activity, boosting unemployment in key states such as Texas. US Congress is likely going to try to find a scapegoat for all these issues. In this case, the scapegoat will be easily found: it will be Saudi Arabia. I think US senators will put further pressure on Trump to talk to the Saudis, and maybe even do more. Yesterday, Trump mentioned he could block oil from Saudi Arabia. It will be interesting to see how Trump reacts given his very strong relationship with the Saudis.
The reason why the Saudis are likely going to be the scapegoat is that they massively boosted exports as a result of OPEC+ talks failing in early March with Russia. In addition to this, the technicalities of the oil market are such that Saudi oil exports to the US are reaching a 1.5-year high
The reason why the Saudis are likely going to be the scapegoat is that they massively boosted exports as a result of OPEC+ talks failing in early March with Russia. In addition to this, the technicalities of the oil market are such that Saudi oil exports to the US are reaching a 1.5-year high: Saudi oil exports to the US should average 700 kbd in March and April, up from just 422 kbd in 2019. Even though this is not the main reason why US oil prices have crashed (Saudi oil to the US will get processed by Gulf Coast refiners while most of US inland production is not targeting the same market given crude oil quality differentials), it makes Saudi Arabia an easy target for US shale companies and US senators and house representatives.
For Russia, lower oil prices will be hurtful if they stay that low for the medium term, but I believe the Kremlin is greatly appreciating the fact that the US is going to take a much bigger hit. In the short term, the situation will be catastrophic for OPEC producers who have a high dependency on oil in their export basket: the likes of Iraq, Algeria, Angola, Nigeria, Gabon, and the Congo.
For GCC producers (other than Saudi Arabia), the pain will be there, though it will bearable thanks to the comfortable financial cushion they enjoy through their sovereign wealth funds' investments and foreign reserves. But geopolitically, this crisis could mark the beginning of a shift for these countries. Given the grim outlook for oil in the long term, they may not recover their past riches ever. Their suffering could come very quickly: in the 2014-2018 period, net financial assets held by the six Gulf monarchies fell by around half a trillion dollars, to around $2 trillion. The lack of diversification of their economies makes them vulnerable in the longer term. Budget cuts will also have geopolitical implications as their defense budget (very high as a percentage of GDP for Gulf monarchies and, in particular, for Saudi Arabia and the UAE) could be one of the first to see cuts. This, in turn, could impact their strong relationships with the US and Western Europe who are major suppliers of weapons and artillery to them.