By Grant Smith
Less than two weeks ago, the world’s biggest oil producers — in a deal facilitated by U.S. President Donald Trump — agreed to slash output in the hope of defending energy markets against the ravages of the coronavirus outbreak.
Yet Monday’s historic slump, in which crude prices fell below zero in the U.S., made the OPEC cartel and its partners painfully aware of the limits of their powers. Some nations in the group are desperately searching for any additional steps they might take to stem the rout, but they have few options.
“The OPEC+ leadership is currently engaged in serious crisis management conversations,” said Helima Croft, head of commodity strategy at RBC Capital Markets LLC. Yet “there is little that OPEC+ can do to arrest the demand collapse.”
Algeria, which holds the Organization of Petroleum Exporting Countries’ rotating presidency, has proposed bringing forward the supply cuts — due to begin on May 1 — to take effect immediately, according to three people familiar with the matter. But there was no sign that the move was backed by OPEC’s key members, or would even make much difference at this point.
Though the production cutbacks pledged by OPEC+ are historically large, at just under 10 million barrels a day or about 10% of world supply, they’re completely dwarfed by the immensity of the demand loss. Consumption will be down by 29 million barrels a day this month, according to the International Energy Agency — more than all the crude pumped by OPEC’s 13 members.
“It was too late, and too little — very much too little,” Paolo Scaroni, former Chief Executive Officer of Italian oil company Eni SpA, said of the OPEC+ accord in a Bloomberg television interview.
While Saudi Arabia and Russia said last week they’re “prepared to take further measures” if necessary, it’s unclear whether they really have the appetite, or the ability, to cut deeper right now.
The current agreement requires considerable sacrifice from Riyadh, squeezing its production to the lowest since 2011 and potentially offering its rivals in the U.S. shale-oil sector the lifeline of a price bump.
For other producers in the accord, such as Russia and Iraq, it’s highly uncertain whether they’ll even deliver the ambitious supply curbs already agreed on, let alone commit to further reductions. Both exporters had a poor track record in implementing OPEC+ agreements over the past three years.
Rather than step up its efforts, OPEC and its partners may simply need to stick to the agreed plan and weather the storm. That will push the burden of adjustment onto other producers, such as the U.S., Brazil and Canada, who have so far offered OPEC+ little more than moral support.
“We’ve reached the stage where this is pretty much outside the control of anybody,” Martijn Rats, oil analyst at Morgan Stanley, said in a Bloomberg television interview. “There is no group of suppliers that can offset this through production cuts.”