Major global oil producing nations will hold a virtual meeting today in an attempt to wrest control of freefalling crude prices.
Opec+, which includes members of the Organization of the Petroleum Exporting Countries (Opec) such as Saudi Arabia, as well as non-members including Russia, is due to begin talks at 2pm UK time.
The meeting would normally be held in Vienna, where the organisation is headquartered, but the coronavirus pandemic precludes it.
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The stakes are high, and oil producers - companies and nations - will be hoping a deal will be announced afterwards that will see production cut globally, thereby reducing supply, and as a result, raising the price.
Will the US attend?
While Saudi Arabia and Russia, two of the world’s three largest oil producers, will be negotiating on screen, the largest - the US - will not. The latter is not a member of Opec+, because the organisation exists to set the market, and this flies in the face of American free-market principles.
Opec+ functions by controlling production, but Washington lacks the legal right to close a US company or limit its output. If they tried, this “would most likely be challenged in court by oil companies”, Forbes says.
Each of the three protagonists wants the price of oil to be raised, and hence oil production to be curbed. They cannot agree to do this, however, because Russia is dissatisfied with the market conditions as they stand: North American oil - particularly shale - companies are benefiting from the high prices maintained by Opec+ members cutting production, without having to cut production themselves.
This is how the US has recently come to hold such a large share of the global oil market. When Russia refused to continue to make further sacrifices to prop up prices while the US benefited, the oil war began.
The reality of the price war, however, is that the US shale industry has massively retracted naturally. The hydraulic fracturing - or fracking - required to extract shale oil is expensive, and cannot be sustained when oil fetches so little in the market.
“This week the Energy Information Administration predicted that by summer the United States would once again become a net importer of oil, as domestic production contracts and overseas markets shrivel,” reports The Washington Post.
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What does Russia want?
Moscow wants a more long-term commitment from the US that it will stop free-riding on high crude prices, and has made it clear that the current retraction of US oil is not enough.
“These are totally different types of cuts,” said Vladimir Putin’s press secretary Dmitry Peskov to reporters in the Russian capital on Wednesday. “You compare total reduction in demand with cuts aimed at stabilising the global markets. It’s like comparing apples and oranges. There is a difference.”
Nevertheless, while Opec+ can hurt individual shale companies in the short term, it cannot eradicate the industry entirely. Shale will simply bounce back when prices rise again.
“If Moscow’s - or Riyadh’s - strategy was to kill the industry, it would almost certainly have failed,” writes Christof Ruehl in Bloomberg. “US finance thrives on such disruption. Even now, American shale assets will be mothballed and change hands, debt will be restructured, and hydrocarbons will flow, quite possibly at a more efficient cost per barrel. Sources of financing may change. The technology is here to stay.”
What does this mean for the rest of the world?
Low oil prices may be good for the global economy as it seeks to recover from the catastrophic recession-inducing effects of the Covid-19 pandemic, but the opposite is the case for Russia and Saudi Arabia’s economies, which rely heavily on their oil industries
As such, they are likely to reach an agreement soon, and that could be today.
“Hopes for the meeting rose after media reports suggested Russia was ready to cut its output by 1.6 million barrels per day and Algeria’s energy minister said he expected a ‘fruitful’ meeting,” Reuters said, reporting that US crude futures rose as much as 6% this morning on the news.
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