OPEC-plus

Like everything else in the world, energy markets are undergoing totally unprecedented convulsions. It seems as if everything that was working before COVID-19 is now broken, and an entirely new rulebook has been thrust upon us. Of course, it is impossible to know how crude oil, natural gas and NGL markets will play out over the next few weeks, much less in the coming years. But if we make a few reasonable assumptions, extrapolate from what we know so far, and crunch through a bit of fundamental analysis, it is possible to imagine what energy markets will look like after the worst of the coronavirus pandemic is behind us. One thing is for sure: things will not be anything like they were before. Where energy markets may be headed next is what we will conjure up in today’s blog.

On Friday, global energy markets entered uncharted territory. Already facing declining demand due to the impact of COVID-19, markets then were dealt a body blow with the collapse of the OPEC-Plus alliance and the resulting prospect of a significant increase in supply. Saudi Arabia wanted to manage supply to balance against lower demand, but Russia was having none of it. Instead, reports from the OPEC-Plus meeting indicate that Vladimir Putin has declared war on U.S. shale. Then on Saturday, the plot thickened. Saudi Arabia made huge cuts in the price of its crude oil, presumably in a high-stakes move to bring Russia back to the negotiating table. Even though we are witnessing unprecedented market conditions, it’s not Armageddon. Crude oil will continue to be pumped, piped, shipped and refined. Most infrastructure projects under construction before the collapse in oil prices will be completed. The big question is, how will the market adapt? In today’s blog, we’ll begin an exploration of that question.

Oil-production restraint by OPEC and 10 cooperating countries grows more challenging with time, and just when market projections began to hint at relief for the OPEC-Plus group, the spread of the new coronavirus in China and beyond became a sudden and possibly serious impediment to global economic growth and oil demand. Yesterday’s slide in crude oil prices amid newly heightened concern about the potential pandemic’s effects will only add to the challenges that OPEC-Plus countries will face in managing crude supply. So far, the OPEC-Plus group has achieved unprecedented compliance with its production ceilings, which it implemented in January 2017 and has adapted a few times since in response to market pressure. That effort has kept the crude price above the ruinous levels of 2015, memories of which have encouraged quota discipline. But the threat of a major, coronavirus-related slowdown in global oil demand could seriously undermine OPEC-Plus’s efforts, which already had been hurt by dissent within its ranks. Today, we continue our series with a look at Monday’s price drop, the latest supply and demand forecasts and a discussion of the obstacles that might affect OPEC-Plus going forward. 

U.S. shale oil production and exports have contributed to global oversupply in recent years, which, in turn, has amplified pressure on OPEC to implement production cuts to keep crude oil prices from collapsing to untenable levels. That’s led to an agreement among most OPEC countries and nearly a dozen other non-member producing countries — together known as OPEC-Plus — to limit production, an accord that’s remained in place since January 2017. However, oversupply conditions now are also prompting U.S. oil and gas producers to pull back on their planned capital expenditures for 2020, suggesting a slowdown in U.S. production growth later this year and into 2021. Recent global oil supply and demand forecasts by the International Energy Agency (IEA), the U.S. Energy Information Administration (EIA) and OPEC itself suggest that such a slowdown, if it materializes, could present a window of opportunity for OPEC-Plus to relax its quotas and potentially reclaim some of its lost oil market share, at least for a time. Today, we examine what the recent changes in monthly data from IEA, EIA and OPEC indicate about potential shifts in the OPEC versus non-OPEC oil supply and demand balance and what that could mean for OPEC’s role in meeting global demand.

In the global crude oil market, at least some degree of coordinated management of supply has been the norm since the end of World War II. From the mid-1940s to the early 1970s, the cabal of oil companies known as the Seven Sisters jointly managed production to keep crude prices at levels that accommodated their interests. Then it was OPEC’s turn. More recently, the efforts to keep supply from overwhelming demand — and help prevent oil prices from crashing — have been led by a combination of OPEC and some other major producers, including Russia. U.S. shale producers — who’ve contributed significantly to the global supply growth in recent years — have both benefited from this supply management and partially thwarted it by continuing to increase production to offset cuts by “OPEC-Plus.” But a projected slowdown in U.S. production growth in 2021 may change these market dynamics. Today, we begin a short blog series on global oil supply and demand trends, supply management efforts by OPEC-Plus, and what it all means for OPEC, U.S. producers and the broader oil market.