NEW SAUDI-ARABIA-RUSSIA OIL CONFLICT IS COMING

 Filenews 28 September 2020

Oil-producing countries are likely to be preparing for another showdown between them before the end of the year, with the powerful players Saudi Arabia and Russia having different views on how to approach the "brake" that has entered the recovery in oil demand in recent times.

The new restrictions on travel and social gatherings across Europe, along with the reduction of state support packages for companies, are having a terrible effect on crude demand, just as the OPEC+ oil producer cartel, which cut its total output by 9.7 million barrels per day in May, begins considering the next easing of restrictive limits on crude production.

Everyone deserves to remember what happened the last time these states failed to agree on exactly what they had to do.

Estimates are revised

The International Energy Agency (IEA) and the Organization of the Petroleum Exporting Countries (OPEC) have resumed lowering their forecasts for overall oil demand levels for 2020.

Over the past two months, the IEA has cut its forecast by 400,000 barrels per day, while OPEC has cut its own by 500,000 barrels. And they may need to be reduced even further.

Neil Atkinson, head of the IEA's Oil Industry and Markets division, said at a Bloomberg event on Thursday that the agency "is more likely to downgrade than upgrade" demand forecasts in its next monthly report.

Both IEA and OPEC forecasts for crude demand in 2020 are revised downward

The biggest impact on oil demand comes from declining trading, weakened economies and the impact of business closures and job losses, Analysts at Standard Chartered, including Emily Ashford and Paul Horsnell, said last week.

At a time when oil demand was expected to recover, it now seems to be heading in a reverse direction again. A new round of state recommendations for work from home and restrictions on social activities, caused by an increase in coronavirus infections in Europe, is to be "met" soon with the reduction of financial support measures.

Oil consumption in the US faces similar hurdles, with government support under the Coronavirus Aid, Relief and Economic Security Act expiring on September 30. Even Asia is not invincible, with Thailand being the only country nearing a Type V-shaped recovery in oil demand, according to Standard Chartered.

The space for an additional offer "narrows"

Of course, it's not all about demand. The space available for additional supply from OPEC+ countries also depends on how much oil comes from other sources. And there is at least the same uncertainty on this front as there is in the field of demand.

There are fears - or hopes, if any rival oil producer - that production from shale oil fields in the US is heading for another big drop in the coming weeks and months.

Oil field completions in the US are now so low that large reductions in production on a monthly basis may be expected, Emily Ashford warned last week.

U.S. crude production has plunged

Definitive monthly data from the U.S. Energy Information Administration show that this year's drop in domestic crude production was steeper and deeper than reflected in preliminary weekly data. A further drop in US production will leave more room for the OPEC+ cartel to increase its own production.

The "battle" within OPEC+

There are, however, problems in the group itself, as I have written in the past. While overall compliance with promised production cuts has been unusually good - thanks, in part, to Saudi energy minister Prince Abdulaziz Bin Salman's unsympathetic attitude - some countries still find it difficult to fully implement their own cuts.

And then there is Libya, which remains outside the agreement on production cuts and creates another major source of uncertainty. The political truce in the opec member country's long-running civil war could allow it to increase exports, adding new volumes to global supply, at a bad time for other producers.

The country's state oil company predicts supply could quickly rise to 260,000 barrels per day, up from about a third of that level. Goldman Sachs estimates that exports could reach double the current one by the end of the year.

Even the world's biggest oil traders - including the Vitol, Trafigura and Mercuria Energy groups - do not have a unified view of the oil outlook in the coming months. Mercuria co-founder and CEO Marco Durnand says "we don't need the extra crude" OPEC+ plans to mine from January. Trafigura executives are also pessimistic. However, Vitol has a much more optimistic view than its competitors.

With so much uncertainty, it is not surprising that tensions are emerging within OPEC+.

Riyadh-Moscow conflict in sight?

Saudi Arabia wants, above all, to prevent oil prices from falling, and its energy minister stresses that the OPEC+ producer group will operate "on the basis of forecasts and prudential logic" in order to stop supply before overstepping demand. So he wants to make oil traders "as nervous as possible."

The anatomy of the agreement on opec+ country production cuts

His Russian counterpart, Alexander Novak, is more cautious and wants to avoid repeatedly revising a deal setting production targets by the end of April 2022.

This agreement foresees that the cartel will add another 2 million barrels per day to its collective production from early January 2021, with Novak preferring to wait as long as possible before making a decision to change plans.

There was a similar dispute in March, with Russia wanting to maintain the status quo and Saudi Arabia seeking deeper production cuts, which culminated in a short period of "free oil for all" and drove the price of crude below $20 a barrel.

No one wants a repeat of this scene.

By Julian Lee

Source: Bloomberg Opinion