/ world today news/ Between the main countries of the OPEC+ group – Russia and Saudi Arabia – a serious confrontation may again develop due to disagreements about oil prices against the background of a depressed slow recovery of demand, writes Bloomberg expert Julian Li. As the analyst reminds, Moscow and Riyadh have already clashed under similar circumstances in March this year, provoking a sharp drop in the prices of the “black gold”, and no one needs a repeat of something like this.
Before the end of the year, there could be another clash between the world’s major market makers, writes Bloomberg analyst Julian Li. As the expert explains, „heavyweight players“ in the market – Saudi Arabia and Russia – have different views on how to respond to the slowing of the recovery in hydrocarbon demand.
The return of restrictions on movement between countries and the holding of public events across Europe, as well as the gradual reduction of programs to support enterprises from many countries, are dampening the demand for oil, and the OPEC+ group with the countries entering it, which in May already cut production by a record 9.7 million barrels per day, meanwhile, it is starting to think about the next easing of production limits, the analyst noted. “Remember how it ended the last time they couldn’t agree on what to do”he emphasizes.
As Li recalls, the OPEC cartel, together with the International Energy Agency (IEA), has again started to cut oil demand forecasts this year: the IEA cut its forecasts by 400,000 barrels per day in the past two months, and OPEC by 500 thousands. Also, Neil Atkinson, the IEA’s head of oil and markets, said Thursday at an event hosted by Bloomberg that in its next monthly report, the agency “rather I will not increase, but will decrease” demand forecasts.
According to the assessment of analysts from the transnational financial corporation Standard Chartered, the main limiting factors for the growth of oil demand are the decrease in trade, the weakening of the economies of many countries, as well as “the domino effect”, which results from business closures and job losses, the Bloomberg analyst continues. Now, when in theory demand should have already started to recover, it started to fall again, which was a result of “new round” from measures to combat the coronavirus, which coincided with government cuts in economic support measures; in particular, according to this scenario, the situation is developing in the United States, where already on September 30, a large-scale economic assistance program was created, provided for in the Act on Aid, Compensation and Measures to Maintain the Economic Stability of Victims of the Coronavirus Pandemic (Coronavirus Aid, Relief, and Economic Security Act or CARES). Asian countries have also been affected – according to Standard Chartered, Thailand is the only country in the region where the oil demand growth curve even resembles the letter V in shape.
Of course, it is not just about demand, as the need for additional oil purchases from OPEC+ countries also depends on how much “black gold” can be imported from other producers, and in this respect the situation remains at least as unclear as with demand, Li writes. As the expert explains, on the one hand, the OPEC+ countries can take advantage of the situation in the USA – judging by the latest statistics, America will face another serious drop in oil production in the coming weeks or months. On the other hand, the group is experiencing problems due to internal disagreements: although, in general, the production limits declared in OPEC+ were respected this time “unusual diligently“which was partly the result of “serious” approach on the issue by Saudi Arabia’s Energy Minister Abdulaziz Bin Salman, a number of countries have yet to fully achieve the level of production cuts they agreed to, the analyst said.
An additional source of uncertainty is Libya, which remained outside the OPEC+ deal to cut production, the author believes. The truce in the civil war that is still ongoing in this OPEC member country could allow it to increase oil exports, increasing supply at an extremely inconvenient time for the rest of the cartel. The state oil company in Libya predicts that the country is able to quickly increase production to 260 thousand barrels per day from the current level, which is about a third of this figure, and by the end of the year, as Goldman Sachs bank already suggests, the volume of exports may exceed this figure twice already.
There is no consensus on what the dynamics of oil market demand will be in the coming months, even among the world’s largest oil traders, including Vitol Group, Trafigura Group and Mercuria Energy Group, Li stressed. Thus, the co-founder and CEO of Mercuria Marco Durnand is convinced that the market “doesn’t need extra oil”, which OPEC plans to start producing in January. Trafigura executives are of the same opinion, and only Vitol takes a significantly more optimistic position than its competitors.
Against the background of such uncertainty, friction naturally began to arise within OPEC+, notes the author. While Saudi Arabia wants above all to prevent a drop in oil prices, and Abdulaziz bin Salman has already stressed that the group will act „preemptively” to prevent supply exceeding demand, his Russian counterpart Alexander Novak sounded a more cautious note, wanting to “avoid renegotiating the terms of the deal, which now sets targets until the end of April 2022.” The deal calls for OPEC+ to increase total production by 2 million barrels per day starting in January, and Novak “prefers to wait as long as possible before changing this condition”Li writes.
„We’ve all seen how far the confrontation between the two biggest OPEC+ monsters can go – similar disagreements, when Russia wanted to maintain the status quo and Saudi Arabia tried to achieve even more severe output cuts, already arose between them in March , which caused a “short crowding” in terms of an increase in supply contributing to the decline in prices of oil below $20 per barrel. No one needs a repeat of this.”– summarizes the analyst from Bloomberg.
Translation: M.Zhelyazkova
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