Price-rigging, once a globally reviled specialty of the Organization of Petroleum Exporting Countries, has been legitimized by the world’s 20 biggest countries but just as OPEC has failed to control the oil market, so will the G20.
Working against today’s agreement of the G20 to try and reduce production and hope that the oil price will rise are the same forces that have dogged oil for a decade; rising supply and slowing demand.
To argue that this time it will be different because there are more countries involved in an attempt to limit supply misses the point that all OPEC members cheated on past promises to produce less oil, and what was hard to police in the past will be impossible in the future.
Cutting Oil Supply As Covid-19 Slashes Demand
Apart from the challenge of major oil producers quickly cutting supply to try and resolve a storage crisis there is the even harder problem of stimulating demand during the Covid-19 pandemic and associated lockdowns of major economies.
Stabilizing the world’s oil industry, which was the core aim of meetings this week of leading oil-producing countries, including the U.S., is more than a logistical challenge, it is a political nightmare because it requires a high degree of trust between signatories to the agreement.
And it’s at that point that a rather obvious question has to be asked: since when did the U.S. start to trust Russia, or that prominent OPEC member, Iran?
The correct answer is either never, or suddenly.
What members of the G20, including the U.S., have agreed with OPEC was showing signs of failure before it was signed with a number of countries, including Mexico, deeply unhappy at accepting a cutback after years of working to rebuild its oil industry.
Negative Oil Remains A Possibility
Last week, as the oil glut threatened to drive the price into negative territory in the same way excess cash has led to negative interest rates, one of the industry’s senior citizens, Andrew Gould, warned that that an attempt to limit oil production was pointless.
The former chairman of the oil services specialist, Schlumberger and recently-retired non-executive director of Saudi Aramco, told London’s Financial Times newspaper that no deal between OPEC, Russia and other producers would work because the drop in global oil demand was too severe.
“OPEC, as the so-called central bank of oil, has disappeared,” Gould said.
As for OPEC’s lead member, Saudi Arabia, working with Russia and the U.S. to limit oil supply, he said he was skeptical.
Even Strongmen Have Power Limits
“No matter how much of a strongman you are, in front of a (Covid-19) pandemic, your power is limited.
“You have to go back to the Great Depression (of the 1930s) to find a time when the market behaved as freely as it does now,” Gould said.
So, if the grand oil-output bargain between a group of countries that don’t trust each other is doomed to fail how low could the oil price go?
Citi Research, a division of Citigroup Global Markets, put a number on the international oil price as measured by Brent-quality crude in a note to clients circulated earlier this week, before the announcement of today’s deal.
The number? A startlingly low $8 a barrel.
Have Your Heard The One About The Eagle, The Bear And The Camel?
Describing the recent round of meetings as encounters between an eagle (the U.S.), a bear (Russia) and a camel (Saudi Arabia), Citi said any agreement was likely to be for just three months, from May to June.
“That would not help alleviate short-term inventory bottlenecks nor reduce inventory levels as needed in the second and third quarter of 2020,” Citi said.
“This scenario looks to keep prices on track with our base case outlook, with second quarter Brent at $17/bbl, with a three-month point price target of $8/bbl, moving back to the high $20s by the year end and the $30s in 2021.”
Sobering as that view is of the oil market it could actually be worse because so much depends on OPEC and other oil producers developing a trust relationship where none has existed in the past — and all during the Covid-19 pandemic.