Oil prices: Markets hold their breath ahead of Opec+ meeting
This afternoon’s crunch meeting between oil cartel Opec and Russia could send shockwaves through global energy markets and send oil prices spiking or crashing.
For weeks oil prices have been in freefall due to a production war between de facto Opec leader Saudi Arabia and Russia. The pair are stuck in a dispute over production cuts, leading Saudi Arabia to flood the market in March.
That prompted a huge collapse in oil prices that saw them hit decades-long lows.
As oil prices have collapsed, calls have grown for a new deal to be made to prop up the oil market, which has shed almost two-thirds of its value since January.
US President Donald Trump has even got involved, with the fate of the US shale market intrinsically tied to the outcome of today’s meeting.
Opec meeting could see production cut of 15m barrels per day
The Opec meeting could see monumental cuts of up to 15m barrels of oil a day.
Such a cut would be around seven times larger than the biggest curb Opec has ever before imposed on producers, when it cut output by 2.2m barrels a day during 2008’s financial crisis.
However, with forecasts for the global drop in oil demand of 25m barrels per day in April alone, analysts are not confident that today’s meeting can do enough to protect the market.
Will Scargill, managing analyst for energy at GlobalData, said: “It seems unlikely that any cut can be on the scale to fully answer the demand shock in the short term”.
Cailin Birch, global economist at the Economist Intelligence Unit, said: “There’s very little that producers can do to raise prices even up to $40 a barrel but there is the potential for prices to fall much further”.
US has both the ‘carrot and the stick’
Analysts are especially nervous that a refusal on the part of the US to cut production could blow the whole deal. They fear that Russia will refuse to curb output unless the US does so too.
“The key factor is that producers are making their participation contingent on everyone else, but it’s unclear how far these contingencies extend,” Scargill said.
Trump is yet to show any inclination towards reducing production in the US. The US is the world’s biggest energy producer, with the country’s “energy independence” a source of pride for the President.
Birch said: “The US’ policy incoherence is not helping. It is coming in with both the carrot and stick. It’s very unclear yet which they’re going to decide to employ: voluntary production cuts or threats to sanction Saudi and Russian suppliers.
“If the US were to lead on sanctions rather than production cuts… Russia would rather maintain national dignity than continue to buoy the US shale market.”
However, there have been signs the US may impose unprecedented production limits on the fragmented shale sector. That is something which initially seemed unlikely, said Birch.
“Originally it seemed like there was no way production curbs could be put on private US producers,” she said. “But it seems like public authorities at a state or federal level might try and put them in, which is unprecedented.”
Opec meeting ‘unlikely to achieve both price support and stability’
In the best case scenario, analysts agreed, the meeting might achieve some form of stabilisation for oil prices. But this is far from certain.
James Davis, FGE’s director of short-term service and crude oil forecasting, said that producers were “unlikely to achieve both price support and stability”.
“They might get one, but not both,” he added.
The heightened political tensions surrounding the Opec meeting mean the worst-case scenario may be just as likely to unfold.
Oil prices could sink to $15 in worst case scenario
In this, Birch said, prices could halve again to south of $15, with storage capacity quickly running out and production forced to stop.
Davis agreed, saying the price could fall as $10 and lower on a daily basis.
However, this decline in prices could be nothing compared to the potential for a natural disaster that the lack of storage space could result in.
One analyst said he was extremely concerned that if storage capacity fills up too quickly and producers cannot halt production in time, the developing world could see devastating oil spills.
Hopefully, this scale of devastation will be avoided, Birch added.
“Producers will seize this opportunity and this deal, however imperfect, to be able to say they ended the price war as a strategic decision rather than because they were forced to stop producing.”
Oil prices face long wait for recovery
Regardless, it will be a long time until oil prices hit the same level as previously.
According to the EIU’s forecasts, prices won’t return to $50 or $60 until 2022 at the earliest.
“It’s finely balanced, and could go either way. But more factors are pushing towards some form of agreement”, Birch concluded.
Producers and consumers will be hoping she’s right.