Podcast – From the Economist's Chair: Forget 2020, save 2021

Author David Fyfe, Argus Chief Economist

Argus Media Chief Economist David Fyfe reviews last week's Opec+ and G20 meetings and the resulting, highly-anticipated crude oil production cut agreement.

The collective cut may not rebalance the market in 2020, but puts the industry on the right track for 2021. Fyfe also explores how crude prices and strategic stockpiles may factor into the recovery timeline.

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Welcome to another podcast in the “From the Economist’s Chair” series by Argus, a leading independent provider of energy and commodity price benchmarks.

I’m David Fyfe, chief economist with Argus Media, and it’s the week of April 13. Today I’d like to briefly review last week’s Opec+ and G20 meetings in a feature entitled "Forget 2020, save 2021."

Opec+ crude producers stared into the abyss of a second quarter oil demand collapse, blinked and decided that a battle for market share is better left until less turbulent times.

At their virtual meeting on the 9th of April, 13 Opec producers and ten non-Opec partners agreed to curb supplies. The agreed reductions amount to nearly 10mn b/d for May and June, 8mn b/d minus change for July to December, and around 6mn b/d for January 2021 through April 2022. If the cuts are implemented, this will leave both Saudi Arabia and Russia producing 8.5mn b/d of crude for the next two months, rising gradually to 9.5mn b/d in 2021.

A lone dissenter – Mexico – rejected calls for it to cut by 400k b/d, but was eventually let off with a pledge to cut by 100k b/d, after lobbying from US President Donald Trump, among others.

A G20 meeting the following day, chaired by Saudi Arabia, had mixed results attempting to bolster the Opec+ deal, although the IEA is due to announce shortly the volumes of oil that member countries will push into strategic stockpiles. Ultimately, whether oil is funneled into SPR for political reasons, or approaches bottlenecks in commercial storage because of collapsing demand, is almost immaterial.

Nonetheless, these voluntary supply cuts are both politically and arithmetically significant. They signal an apparent rapprochement between Saudi Arabia and Russia, after a month of muscle-flexing over who could boost supply the most. They throw a slender lifeline to a non-Opec upstream supply sector struggling, just like other industries, to deal with the coronavirus-derived demand collapse. And they will augment cumulative economic and logistical shut-ins by non-Opec, which Argus Consulting estimate could amount to 5mn b/d over the next 12 months.

US production may fall by 2mn b/d over the course of this year according to the US EIA, and Canadian pipeline operator Enbridge sees 1mn b/d of western Canadian supply likely shuttered in 2Q2020 alone. US, Canadian and other non-Opec reductions, however, are economic and logistical, rather than politically-mandated closures.

True Norway may cut volumes voluntarily in support of Opec+, and President Trump also retains powers to impose additional crude export quotas. But the latter option risks backing-up even more oil within the US, weighing further on physical price benchmarks, already trading at substantial discounts to headline futures prices.

Despite the large production cuts now envisaged, prompt crude prices will likely remain weak, certainly this quarter, and potentially until late in the year. The cuts were never realistically going to match the sheer scale of a 17mn b/d year-on-year collapse in oil demand this quarter. So, already-apparent storage and pipeline bottlenecks will only get worse before they get better. There is little likelihood the surplus can start to be meaningfully reduced before late in 2020. It could even take longer if Covid-19 proves to be both an unwelcome and stubborn visitor by re-emerging again next winter.

Rebalancing the market needs access to floating storage and persistent market contango. Non-Opec supply adjustment will only occur if break-even prices are persistently challenged. And re-enforcing the eventual demand recovery, whenever that happens, requires a nudge from weak end-user prices too.

So, despite the significant, and arguably welcome, decision by Opec+ this last weekend, few expect rapid results. The challenges confronting producers are many. Vulnerable US shale companies and other high cost producers remain under threat. The longer industrial shut-downs and social distancing persist, the weaker demand will remain, and the greater the risk that Opec+ discipline ultimately splinters. Even an optimistic rebound scenario for oil demand suggests this is a deal more likely to bear fruit in 2021, than in 2020. But it’s better than no deal at all.

That’s all for this episode, and thanks for listening. You can find more news and content on our website, and more podcast episodes on www.argusmedia.com/podcasts or on streaming services such as Apple Podcasts, Google Play Music, Stitcher and Spotify. Thanks again.

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