SHANA – Look at these remarks made by heads of states in the aftermath of sinking oil prices and demand destruction caused by the coronavirus outbreak: “We will not give in to Saudi oil extortion”, “Coronavirus and Saudi Arabia are the cause of falling oil prices”, “Russia’s energy minister was the first to tell the media that OPEC+ production cuts would face away as of April 1”, “It is a free market and Saudi Arabia and Russia must resolve the price war they have waged which has caused the fall in prices”, “How can Russia and Saudi Arabia not agree and prevent the prices from sinking? What about the responsibility for humanity? Where has global brotherhood gone? Where are the so-called world leaders?”
Everyone seems to be blaming others for the current circumstances. In order to sift through contradicting approaches, Shana correspondent spoke to a number of analysts and experts in the economics and political economy, familiar with the Organization of the Petroleum Exporting Countries (OPEC) and the oil market, to find out what is really going on.
Some of the analysts accused Saudi Arabia for lowering oil prices and others blame Russia for the current market conditions. There are a number of others, however, who believed that OPEC was still an influential third-world organization, while others said it was on the decline. Some saw the current situation as an opportunity for Iran, while others viewed it differently.
Oil Market at Odds:
Oil prices fell more than $20 a barrel during the month of March after the failure of the OPEC+ talks and the outbreak of coronavirus. Oil is currently being traded at around $20/d. The OPEC oil basket also dropped to 25-year lows to around $16/d in April 1. The oil market is strangely unpredictable these days.
Mohsen Ghamsari, former director of international affairs at the National Iranian Oil Company, told Shana about the current state of the oil market: “It seems that the market is strangely subject to developments and demands of the powers and is being manipulated by the agents of these powers.”
“The only thing that can be said about this market is that it is unusual and hard to predict,” he said.
OPEC is a cartel. Or, is it?!
“I’ve been against OPEC all my life, because what is it? It’s an illegal, you could call it a cartel, you could call it a monopoly, but it broke down very violently, so I don’t care about OPEC, I couldn’t care less about OPEC. They are destroying themselves,” US president Donald Trump recently told a press conference. He also said that Russia is a powerful country and a US partner.
On the one hand, the President of the United States disgraced OPEC and called it a cartel, and on the other hand, asked the same organization for help to repair the prices.
A source familiar with OPEC affairs, however, told Shana: “The current situation in the oil market has proved that OPEC is not a cartel, but the most effective organization in balancing the market. Now Trump, despite threats, is resorting to OPEC to save shale oil industry.”
“Interestingly, Trump is making the request while accusing OPEC of dumping and threatening to impose tariffs on oil imports, which is ultimate self-aggrandizement and bullying,” the expert, who preferred to remain anonymous, further said.
“Even seeming to be hostile towards organizations like OPEC is believed to build Trump some face; which is why, despite being anxious to ensure OPEC’s cooperation, he continues to act like he has bullied its members to act in line with his policies; just like the way he treats Russia and North Korea,” says another analyst on Trump’s behavior toward OPEC.
OPEC cannot do anything alone:
Some experts are of the opinion that OPEC has weakened with the growth of shale oil production in recent years and is no longer as influential in world markets as it used to be.
Safar Ali Keramati, a former director of international affairs at the National Iranian Oil Company, does not bother to hide his concern about the dwindling effectiveness of the organization in managing the oil market: “Due to the increase in non-OPEC production in recent years, OPEC’s role and weight in the market has weakened. Certainly, without the participation of non-OPEC producers, OPEC is unable to manage the current oil market.”
“Given the impending crisis in the world economy due to the outbreak of the coronavirus and the demand destruction in the market, there has been a double-barreled shock to the market. The prices are likely to sink as low as $10/b if the OPEC-non-OPEC row persists.
Keramati, who also has a history of serving in the OPEC affairs department of NIOC, notes that in the history of OPEC and perhaps the history of the oil and gas industry, such a situation is almost unprecedented. It seems that if the situation is not handled properly, the entire oil and gas industry is poised for bankruptcy.
A well-informed source familiar with OPEC also focused on a proposal to curtail 10 to 15 million barrels a day of oil supply in the market, saying: “The volume needed to reduce is too high, and OPEC alone cannot afford it. However, the main burden of reduction will have to be shouldered by Saudi Arabia. Saudi Arabia is now forced to cut a significant portion of its output even for a month or two after taking steps to skyrocket its output.”
US moving toward energy dominance:
Among the analysts are some who believe that Moscow is the most likely culprit for the current price crash in the oil market.
“The Russians are not at all happy with the current state of affairs,” a senior energy expert, who spoke anonymously as a condition of sharing his analysis, told Shana, adding that the United States was moving from energy independence to energy dominance. “What means do the Russians have to limit the United States other than keeping the prices low?”
“It’s unlikely that the Russians will seriously participate in any major production cuts,” he said. “For Russia, it’s not about the economy at all. For Russia, it is of a security and survival nature. They do not want the fate of some OPEC members. So, now they have to take action to stop further growth of the US shale industry and market share.”
“Even tomorrow would be too late for Russia because with the prices recovered, shale oil market share will rise immediately, paving the way for sanctions against Moscow,” he said. “I think if the United States fails to gain from the ongoing talks, it will opt for a military strike as an option with Iraq as an epicenter in order to salvage its oil industry. The Iraqis understand this very well, which is why the Iraqi Minister of oil has seriously supported the OPEC+ extraordinary meeting.”
He noted the historical nature of the Russians, who did not want anyone to look down on them, and said that Russia seemed to be waiting to be courted by the US to help repair the prices. “On the contrary, Trump is pushing Russia and Saudi Arabia to undergo output cuts and has threatened to punish them is they fail to comply. Saudi Arabia cannot bear any US punishment, and Russia does not seem to undergo any production cuts.”
Increased bargaining power of consumers:
“An 8-magnitude earthquake has shaken up the oil market; and the cause of this failure is Saudi Arabia’s insatiable thirst to increase market share on the one hand and increasing US production on the other.” This is the view of one of the leading analysts on OPEC and the oil market who talked to Shana.
He noted that the unprecedented decline in demand for crude oil caused mainly by the COVID-19 outbreak, has destroyed demand by 15 to 20 mbd by some estimates. Moreover, the sharp supply increase by Saudi Arabia mostly by tapping its inventories rather than pumping oil from wells, has created a historical supply glut in the market, making it impossible for the market to recover to its previous condition.
The senior oil market analyst emphasizes that the monthly storage of 300 million or more barrels of oil gives strong bargaining power to consuming countries, adding Russia would only be willing to reduce production if the United States accepts a reduction in its output. Trump, however, seems reluctant to cut US oil production.
He further said $40/d price would reduce US shale output by at least a million barrels per day which is not perceivable give the coronavirus outbreak currently.
Morteza Behroozifar, a senior expert in energy economics, also tells us: “I don’t think the price of oil will go above $40 to improve the demand because of the virus.”
“Unless the situation considering the virus stabilizes, the oil market will not be stable. Producers, especially Russia and Saudi Arabia, will have to agree and the current price will be better,” he said.
Tolerance now, market share later:
“Iran and countries with limited exports in the oil market have the least losses,” says another expert. If the current situation persists and the price remains at around $20/b, more than 7 million barrels of oil will be squeezed out of the market, of which four million or even more will belong to the United States.”
He believes that with the current price of oil, a large part of the world’s oil production will be destroyed, especially in the United States, Canada and even Russia. “If Iran can withstand the current situation and adapt to the situation when demand returns to normal and the world seeks balanced prices for oil, Iran’s share will return. In any case, for Iran, low prices in the medium and long term are the best strategy.”
[Interview by Roya Khaleghi; edited by Amir Dashti; English version Abbas Hajihashemi]