(Forbes) As 2019 came to a close, oil prices were under pressure from the continued surge of U.S. shale oil. Although OPEC and its partners had already cut production by more than 1 million barrels per day (BPD), U.S. oil production had grown by about 2 million BPD from early 2018 to late 2019.
While some are quick to credit soft demand with the assault on oil prices, the reality is that oil demand is still growing each year by over 1 million BPD. The real challenge for OPEC hasn’t been soft demand — it’s the continued onslaught of shale oil production.
Following a failed price war that started in 2014, OPEC’s strategy has been to prop up oil prices by cutting production. The cartel is now in a waiting game with U.S. shale producers, cutting production to keep prices propped up, while holding out for flatting or declining U.S. shale production. When that eventually happens, OPEC will be back in the driver’s seat — assuming it doesn’t take so long that electric vehicles (EVs) are by then cutting deeply into oil demand.
In December 2019, OPEC and Russia attempted to respond to sliding oil prices with new production cuts. Following its December meeting in Vienna, OPEC announced it would increase its production cuts by another 500,000 barrels per day (BPD).
That brought the total production cuts from OPEC and its allies to 1.7 million BPD. But then along came coronavirus, which is a black swan event. At the beginning of 2020, nobody had yet died from the virus. Now, the death total has surpassed that of the SARS virus that caused energy prices to slump in 2003.
China is aggressively attempting to contain the virus, and that is impacting the Chinese economy. (At least one economist is warning that the virus is going to paralyze China). As the world’s largest oil consumer, a slowdown in China’s economy suddenly has a real potential of impacting oil demand growth. Thus, OPEC now has to contend with U.S. shale oil growth and a short-term impact on demand.
The dual threat caused a 20% slide in oil prices from the beginning of the year to early February. Last week OPEC members met with Russia (among others) with the hope of announcing additional production cuts that might stabilize oil’s free fall. This time Russia refused.
As fellow Forbes contributor Ellen Wald pointed out, “Russia has its own reasons for keeping production at current levels—mostly because its oil companies and government need the revenue.”
OPEC had hoped to announce additional production cuts of 600,000 BPD, but with Russia’s refusal to participate, no action is anticipated before OPEC’s next meeting in March.
Meanwhile, the oil price free fall could continue, if coronavirus continues to spread. At present, that looks likely. How far prices fall at this point will be a function of the spread of coronavirus and OPEC and Russia’s eventual response (or lack thereof).
Source: Forbes
