Saudi oil experts believe that the recent OPEC plus agreement to reduce oil production will help to balance the market situation in the second half (H2) of 2020. The market balance is likely to come despite the historic meltdown in oil markets after the price of Texas Intermediate crude slumped catastrophically to -$37 last Monday.
The experts said the decline in recent decades does not directly affect the GCC, because of the difference between Brent crude prices and West Texas Intermediate. Brent crude is produced in Europe, Africa and the Middle East, whilst West Texas Intermediate is produced in the US.
Some experts believe however, that the global oil industry is interlinked, despite this difference in origin. They also believe that this is reflected in the low price of Brent Crude, which includes 13 types of oil worldwide.
The price per US oil barrel witnessed a sharp 94% decline during trading last Monday, recording $1.04 per barrel, the lowest level in its history, Fahd bin Gomaa, member of Saudi Arabia’s Economic Affairs and Energy Committee told Daily News Egypt
He also said that US oil prices have no strong impact on the Saudi economy. This is due to the Saudi market’s not being the sole target of US exports. The Saudi market could, however, only be impacted by the price of Brent crude.
Bin Gomaa said that NYMEX West Texas Intermediate (NYMEX WTI) production does not exceed 500,000 bpd and targets a different market to Saudi Arabia, which targets East Asia. It is on this basis that the impact of NYMEX WTI is limited, especially as it is priced according to Brent Crude.
Bin Gomaa said that June projections for the Brent Crude oil futures prices stand at around $15 per barrel, with West Texas Intermediate priced at less than that.
He added that the US oil crisis is set to continue, with particular attention paid to the 21st of each month when the US makes its shipments. Should there be no storage, US oil prices will be impacted again in a similar, but less severe, manner to earlier in the month when it faced a 300% drop. Should this happen, it is likely that production cuts will be applied from the beginning of May 2020.
Bin Gomaa said the futures curve begins to rise at the beginning of the month, peaking mid-month, until it reaches what is known as the settlement or entitlement point.
The huge drop in US oil prices can be attributed to a glut in oil supply which in turn mean that the cost of storage became excessively high. With ships full of crude oil unable to release their loads due to high storage costs, the oil shipments’ recipient found themselves in trouble due to the high costs of storage. Despite their receiving a full stock of oil, the costs of storage appeared to be an opportunity for speculators to reduce the price to the lowest possible level.
Bin Gomaa said that the Saudi Cabinet agreed last Wednesday on additional procedures in cooperation with OPEC plus that will balance the market. These would come as part of further measures to lessen production among partners in efforts to prices.
He stressed that the oil producing countries have shown a commitment to limiting production to allow prices to recover even if it takes months for this to occur. A tangible recovery may not take place until later in 2020 or early in 2021, when oil prices are anticipated to return to the range of $40 per barrel.
The coronavirus is the main instigator of the crisis, which has caused the suspension of world economies and negative economic growth worldwide, Bin Gomaa said.
The demand for oil has now declined to 30 million bpd, with production anticipated to decline further to 20 million barrels. This compares to the 9.7 million bpd reduction decided upon by OPEC Plus, which is not sufficient to balance supply and demand.
Bin Gomaa said that the OPEC Plus group’s recent agreement will help support prices, especially as Saudi Arabia had asked for general reduced production among partners. The price of a barrel will not witness a significant increase, due to the exceptional global crisis.
The Saudi expert believes that the price trend will be similar to the shape of a letter “U”, with a slump to period of low prices before prices return to normal. This recovery is linked to the global economy’s ability to resume activity and restore its vitality following the pandemic. Gomaa added that, as long as the pandemic is not over, prices will not rise quickly.
In all cases, the oil market consistently remains strong with improvement anticipated by the third quarter (Q3) of 2020.
“I expect that the oil market will improve after the implementation of production in accordance to OPEC plus starting 1 May,” Gomaa said, adding “It will unstable in the second quarter and will start to stabilise in the third quarter and finally face gradual increments in the last half of the year and beginning of 2021.”
Gomaa said that to see general economic improvement, there should be balance between supply and demand under a commitment to reduce production.
Brent prices averaged a price of $37 a barrel in 2020, with WTI at $31 a barrel. Traders are now scrambling to find storage for oil supplies to maintain oil prices, with caves, trains and oil pipelines now being used as storage areas.
With producers suffering due to the lack of additional storage places, some have been forced to look for buyers paid with money in exchange for receipt of oil surplus, making it a double loss.
Last week, OPEC announced it had reached an agreement with its partners to reduce production by about ten million bpd as of May.
Petroleum expert, Engineer Omar Al-Koumi, said that the OPEC Plus agreement to reduce production, is not sufficient to restore the balance of oil markets again.
Al-Koumi added that the impact of reducing daily oil production, even by 10 million barrels a day, will have little impact on oil markets, as a result of a significant decrease in consumption. He attributes the ongoing coronavirus (COVID-19) pandemic as the cause of the interruption, particularly in economic activities.
Al-Koumi indicated that coordination between Saudi Arabia and Russia to agree to further reduce oil production has been hinted at.
In early April, OPEC and allies led by Russia agreed to a record cut in output to prop up oil prices due to the pandemic. They said there had been an unprecedented deal with fellow oil nations, including the US, to curb global oil supply by 20%.
Measures to slow the spread of the coronavirus have destroyed demand for fuel and driven down oil prices. At the same time, it has strained oil producers’ budgets and hammered the US shale industry, which is more vulnerable to low prices due to its higher costs.
Saudi Energy Minister Prince Abdulaziz bin Salman told Reuters that effective cuts by OPEC Plus would total 12.5 million bpd, as Saudi Arabia, the UAE and Kuwait would cut supplies further given higher output in April. Producers will slowly relax curbs after June, although reductions in production will stay in place until April 2022.