The oil-price war is not over – it's just on hold

Both Opec and Russia have agreed to restrict oil output by ten million barrels per day from next month. But the oil price war isn't over yet.

“The short, violent oil war of 2020” is over, says Noah Rothman in Commentary magazine. Producers led by Saudi Arabia and Russia launched an all-out contest for market share last month, triggering a supply surge amid historic virus-induced demand destruction. Yet with prices plunging to 18-year lows of $23 a barrel the pain proved too great. 

Producers in Opec, the oil exporters’ cartel, along with Russia (“Opec+”) have now agreed to restrict output by ten million barrels per day (mbpd) from next month, about 10% of global supply. Norway, Canada, Brazil and the United States should deliver five million mbpd in additional cuts.

Too little, too late

Crude prices barely budged at the start of the week despite the historic scale of the cuts, say Myra Saefong and Barbara Kollmeyer on MarketWatch. The price of black gold has bounced off its March lows, with Brent crude now around $30 a barrel. After weeks of a “damaging price war” the new measures appear to be “too little, too late” to rescue prices, which have crashed by more than 50% since the start of the year.

The cuts don’t look so impressive against the “untold numbers” of cancelled commutes, plane trips and cargo shipments triggered by the virus shutdown, says Clifford Krauss in The New York Times. Global oil demand is down by somewhere between 25-35 mbpd, up to three-and-a-half times more than the new cuts. That means that even in the unlikely event of Opec+ nations fully adhering to their pledges the market will remain in sizeable surplus in the second quarter, says Caroline Bain of Capital Economics.

Yet the second half of 2020 could be more positive. If economies return to work and US shale production drops off as forecast demand could outstrip supply later this year. The US shale industry is certainly having a difficult time, says Krauss. Shale oil wells in Texas and North Dakota need prices above $40 a barrel to turn a profit. The industry is “decommissioning rigs and fracking equipment and laying off thousands of workers.” Some supply will be permanently removed from the market.

It remains to be seen how long the deal holds, says The Economist. Sustained output coordination across an “unwieldly cast” of Opec+ and G20 states will prove difficult. Non-compliance could quickly cause the accord to unravel, while market watchers note that state-owned Saudi giant Saudi Aramco is shipping oil to Asia at steep discounts in order to maintain share in a vital market. “The global oil-price war is not over, but on hold”. 

A short reprieve

“Opec looks just as dysfunctional as before”, agrees Lex in the Financial Times. Analysts have warned that oversupply threatened to overwhelm global supply capacity next month, yet this output deal will only postpone “serious supply and demand imbalances for a month or so”. Brent crude probably hit a bottom last month but the chances of any “sustained rally” from here seems “vanishingly slim”.

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