All eyes on Opec+ meet: 4 possible scenarios

Crude oil prices surged 30 per cent last week, logging their best single-day gain on record after a tweet from US President Donald Trump offered hope that the resolution was possible between Saudi Arabia and Russia. He also hinted at a coordinated cut of up to 10-15 million barrels per day by oil producing countries, including the US, Canada and Mexico to stabilise the market. Yet, the optimism faded after news emerged over a delay in virtual meeting between the Opec and Russia.

Optimism over prospects for a deal had sent benchmark oil futures to a record gain, despite an unprecedented global demand loss due to the Covid-19 outbreak. Failure to reach a deal would likely cause prices to crater again.

OPEC++ arrangement would take producers into uncharted territory. Formal commitments on production would be hard for some, particularly the US. In the US and Canada, softer commitments, signals or commitments from the industry or authorities below federal level are more likely.


Here are four possible scenarios that investors should be ready for:

First scenario is the Saudis and Russians going back to the table with a clear mandate to cut production, and the US finding a way to contribute to the deal. Brazil, Canada and perhaps others agree to chip in. Saudis will declare victory, claiming their tough action brought a truly global response. A pledge to cut a historic 10 mbpd or higher would require huge diplomatic efforts, some exceptional political maneuvering in the US and some clear incentives for Russia, but this would take time to pull the details together.

Second scenario would see Saudi Arabia backing down from its threat to flood the market, but failing to secure broad agreement. This might mean that Russia would attend meetings, but politely decline to do much. The US would fail to pull together firm commitments. In this scenario, production would be shut in any way as buyers evaporate and storage fills up, but without a market-supporting deal.

Third scenario could see the Saudis and Russians agreeing to come back to table, but without the US and others joining in and boosting prices.

Fourth scenario is a potential lack of will to make tough choices, inability of the US to deliver cuts, and a lackluster Russian appetite for major reductions. This scenario could unfold if positions harden, current diplomacy stutters and the current inability to meet face-to-face, rather than via video conference, hampers dealmaking. The market response could be brutal, with prices collapsing to even lower levels.

Without action from producers to reduce supply, the situation will get much worse as the world runs out of places to store crude pumped out of the ground that nobody wants. A big production cut could delay reaching that breaking point, perhaps for long enough for demand to start to pick up again. But it won’t happen unless everybody plays their part.

Opec has invited the Texas Commission to participate in its June meeting. After Trump’s statement it seems unlikely that any production commitment is forthcoming. Moreover, it looks like we might have a new diplomatic rift between Russians and the Saudis. Over the weekend, the dispute between Moscow and Saudi Arabia over who is to blame for plunging crude prices intensified. Saudi Arabia’s energy minister issued a statement, saying comments from Russia’s energy minister Novak were categorically false and contrary to fact. Saudi Arabia made a pointed diplomatic attack on Russian President Vladimir Putin, opening a fresh rift between the world’s two largest oil exporters and jeopardizing a deal.

The statement said Saudi minister expressed his surprise at attempts to bring Saudi Arabia into hostilities against the shale oil industry. The minister noted that Saudi Arabia was a major investor in the US oil sector. Saudi Arabia is making painfully clear that the sacrifice must be shared or the Middle East nation will take no part in it at all. There can be no free-riders. Either they agree to strict, enforced, observable output curbs for everybody and Saudi Arabia will join in by reducing its own output to, say, 8.5 mbpd or the country will continue to pump 12.3 mbpd, which would result in prices collapsing to $15.

Along with the division, reports suggest that Trump ramped up his threats to impose oil import tariffs as renewed diplomatic tension between Saudi Arabia and Russia threatened efforts to reach a new deal.

Question of whether Trump should go ahead with tariffs leads one into a deeper debate: i.e. Is it right to save US oil producers and hurt the country’s refiners, who depend critically on Saudi and other foreign-sourced crude to make the kind of fuel products that gasoline-friendly American shale oil isn’t capable of? Will US import taxes be a big enough deal to force the Saudis and Russians to back down from their production-and-price standoff and negotiate a reduced output deal?

Shale industry

Estimates suggest that hundreds of thousands of US oil industry jobs are hanging in the balance, with about $15 billion of investments wiped off from the budgets of shale explorers and many of them on the brink of bankruptcy. Gasoline pumps are sitting idle as people cancel their travel plans amid the worsening coronavirus outbreak. Global oil storage is filling up fast in this context, despite rising costs of storage, -- in some cases by as much as 100 per cent. The situation is unusual. Gasoline is getting cheaper because of tanking crude oil prices, but drivers in the most car-loving country in the world cannot take advantage of these lower prices because they have to self-isolate at home. The US consumes about 20 million bpd of oil and products, with gasoline consumption at 9 million bpd.

Conclusion
For the week, given the delay in the Opec meeting and rising tensions between Saudi Arabia and Russia, pessimism is expected to return to the crude oil market. With this new Saudi-Russia spat, it doesn’t look like it’s going to come together.

(Investors are advised to consult financial advisers before taking an investment calls based on these observations)