Lower oil costs force OPEC to cut

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Record cuts in OPEC-led oil production in reaction to demand and oil collapse have helped stabilize the oil market in recent months.

Still, the value of oil has remained at a low of $40 since the end of the quarter of the moment. While this is a massive improvement (double the minimums noted in April), $40 oil is about part of the oil value that many OPEC members, adding the largest manufacturer. and the de facto leader, Saudi Arabia, want to balance their budgets.

OPEC and its main partner outside OPEC, Russia, want oil costs above $40 for their oil-dependent economies, which have been affected by the pandemic slowdown.

However, costs have stubbornly persisted in close diversity since June, after symptoms began to emerge that the global call for oil recovery is not recovering temporarily enough to justify higher costs.

At the same time, OPEC is smoothing out its production cuts and even (if ever) has managed to get all manufacturers to fully meet their quotas.

This increase in source and the expected slowdown in recovery are now shifting the market to excess source, as noted through weak physical markets and the expansion of contango design in the oil futures market.

OPEC was trapped between the sword and the wall again.

Should OPEC stay on course with the cuts, hoping that the planned recovery will recover next year, bearing up the low oil costs for longer than OPEC budgets are crushing?

Ideally, OPEC deserves to seek to balance superior short-term costs with superior long-term market share, writes Robin Mills, managing director of electrical consultancy Qamar Energy and The Myth of the Oil Crisis, at The National.

Escape strategy

Such a balancing exercise is less difficult to say than to do. Current costs are well below the point of convenience for one of the oil manufacturers in the agreement. But to return to deeper cuts in market rebalancing more temporarily and opposite to the bearish sentiment of recent weeks. would mean an additional loss of market share, which could raise costs to the degrees in which the US shale would be able to do so.

It is true that this time OPEC has developed a medium-term exit strategy until April 2022 Existing cuts of 7. 7 million b / d, from 9. 7 million b / d, are expected to minimize the extra to from January 2021 to 5. 8 million b / d. It will remain in effect until the end of April 2022.

With the accumulation of evidence suggesting that the requested recovery has stagnated and that demand for all types of fuels, especially jet fuel, is unlikely to return to pre-crisis levels until 2023, there are increasing assumptions as to whether or not OPEC may or would not want to review its agreement to help the elusive rebalancing market and , therefore, of prices.

$40 oil too low for OPEC

The top compelling argument for the deeper cutting strategy may simply be that all OPEC economies, from Saudi Arabia and Kuwait to Russia and Kazakhstan, are suffering from low oil prices.

Saudi Arabia saw its deficit at the time of a quarter of US$29 billion due to continued falls in oil costs and oil demand, tripled its value-added tax (VAT) and suspended living costs as a component of a new series of painful austerity measures. Budget savings of $26. 6 billion ($100 billion from certain government agencies) also included cancellation, extension or postponement through the Kingdom of safe and consistent capital and capital expenditures of certain government agencies, as well as relief from provisions for a Kuwait is running out of cash for public officials’ wages and will not have cash to cover them after November , unless oil costs significantly. Russian President Vladimir Putin prefers costs over $46 consistent with the barrel. Traffic levels in Europe and Asia close to pre-COVID grades

But they will want positive news of the look of the call to boost market rebalancing. These days, there is no positive news for the call and the market reacted with a fall in brent Brent this week below $40 consistent with the barrel for the first time since June.

But the long-term market share may be higher

While bullish people in the market place (and OPEC budgets) desperately want a rebalancing at the market site as soon as possible, Saudi Arabia sticks to production cuts as it is despite the recent fall in the price of oil, the Financial Times reported wednesday, with five resources in which while this week’s fall in value is causing fear , but not panic, in Saudi Arabia, the leader of OPEC does not see the need for larger cuts, for fear of wasting the percentage of market place for other producers, FT reresources said.

The market percentage is firmly in the minds of OPEC, judging by this week’s comments from Russian Energy Minister Alexander Novak, who said: “It will be amazing for Russia and other oil manufacturers to recover their market share as temporarily as possible, and even accumulate it. “when asked to return to pre-crisis levels. “

OPEC took advantage of the peak of the U. S. shale in the 2020s to regain market share, but the pandemic and the boost toward low-carbon energy have raised fears that the crisis has particularly accelerated the time of peak oil demand.

However, this market share could mean that OPEC will have to give up its short-term tax revenues, forcing them to borrow much more, intensify austerity, and make more use of the sovereign wealth budget to cover budget deficits.

With the rebalancing of the repressed oil market with a slower recovery in demand, OPEC faces the same old dilemma: will short-term pain lead to long-term gains?

By Tsvetana Paraskova for Oilprice. com

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