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Oil certainties beyond COVID-19

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By Sonny Atumah

The oil demand growth in China since the dreaded COVID 19 that became an issue this year is close to zero. However, the oil demand growth has been on the decline even before the coronavirus.

The pressure in the market, a result of continual plunging oil prices led to the alliance between the Organization of the Petroleum Exporting Countries (OPEC) and its ally’s non-OPEC, to form the OPEC+ for unified position to cut production three years ago. Saudi Arabia is the de facto leader of OPEC while Russia leads non-OPEC. The two major producers lead the super cartel. Russia is the world’s second-biggest oil exporter after Saudi Arabia. Call it manipulation; their unholy alliance makes one of them plays the second fiddle at any convenient time. Saudi Arabia and Russia are always there for the drama that seemed rehearsed in the global oil market. The OPEC+, so far always strikes a last-minute deal by settling for deeper output cuts to lift oil out of the bearish sentiment.

Also read: Post-OPEC Deal: Oil price stability raises hope for budget benchmark

The alliance as it is today is considering a further production cut to offset the demand slump occasioned by the dreaded coronavirus. The OPEC+ earlier in December agreed to deepen oil cuts to 1.7 million bpd from 1.2 million barrels per day (bpd) until the end of March. The deal included an additional voluntary cut of 400,000 bpd by Saudi Arabia, which means the alliance will trim its production by 2.1 million bpd through to March. This week, Saudi Arabia pushed for one million bpd output cut, a figure that is higher than the 600,000 bpd initially proposed by OPEC’s Joint Technical Committee, JTC. Nevertheless, Russia has been cagey and hesitant on the JTC recommendation. Is Russia playing hard to get? The coalition formation three years ago ordinarily was on a temporary basis to contain plunging oil prices. Is that why Russia has been foot-dragging for months on the issue of production cut? While the Saudis are routing for higher oil prices, the Russians are confident with crude futures between US$50 and US$60. In February, Russia pleaded for more time with the Joint Technical Committee meeting to analyse the impacts of the coronavirus outbreak before it could reach a decision.

Analysts believe that the Russian government is mulling over the OPEC proposal for production cut because it can manage its fiscal pressure, which was an issue in the past.  The 2020 fiscal breakeven price for Russian crude is US$42.4 per barrel. It has a foreign reserve of US$500 billion. Saudi Arabia and other OPEC members tried to persuade Russia on Wednesday to join in the large additional oil output cuts to prop up prices, which have tumbled because of the coronavirus outbreak. The OPEC is a group made up of countries that have their budgets mostly tied to the apron string of crude oil vulnerabilities. Nigeria may have become a casualty in the whipsaw crossfire as its target in the 2020 spending plan based on crude price benchmark of US$57 a barrel is becoming unrealistic. International benchmark Brent crude traded at US$51.46 on Thursday afternoon, up more than 0.65 per cent, while U.S. West Texas Intermediate (WTI) stood at US$47.14, approximately 0.77 per cent higher. The situation had been that of a panic mode even before the coronavirus scourge. The Russians have learnt their lessons from previous experiences including the global financial crisis of 2008/2009 and the oil crash of 2014.

The Russian Energy Minister Alexander Novak took his leave at the Vienna meeting on Wednesday. From his action, there are fears that crude oil prices that made marginal gains would witness another collapse and incalculable damage. The Wednesday’s script that was dramatised, had a preview made last Sunday by Russian President, Vladimir Putin who put it that current oil prices were acceptable for the Russian economy. Putin put on the posture that Russia’s large financial reserves do not eliminate the need for action, including, in co-operation with their foreign partners. By Thursday as one filed this story, there were contemplations that Saudi Arabia may go the whole hug with its group to salvage what was possible in the oil demand that was sliding almost precipitously. In early January Brent crude futures was already 19 percent low because of oversupply in the market. The whipsaw situation now is strong oil supply growth from the large inventory and low demand growth from economies that is melting down and coronavirus scourge.

The OPEC+ met on March 5-6 to consider it’s Joint Technical Committee’s recommendation cutting oil output by between 0.6-1 million barrels per day (bpd) during the second quarter only. Others believe that Russia may capitulate, as the Kremlin has the penchant for making a last-minute decision with OPEC. With a breakeven price of US$42.4 price per barrel, Russia is still vulnerable should crude prices slide into the lower forties. Saudi Arabia has the lowest production costs for oil projects in the world, it said in its newly released IPO prospectus. Their partner producers such as Russia, Venezuela, and Nigeria have much higher production costs. In crucial crises periods previously, analysts say both the United States and, especially, China unleashed enormous fiscal stimulus to counteract the economic disruption. This time, the crisis emanates in China, and the Trump administration is relying on the Federal Reserve to shore things up; and the reaction was a surprise rate cut.

Vanguard

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