MOSCOW, March 31. /TASS/: The decline of oil prices that began after the collapse of the OPEC+ agreement has not yet been completed. Prices may drop to $15-20 per barrel in the near future, experts interviewed by TASS said. However, they believe that withdrawal from the OPEC+ deal to limit production, which will enter into force on March 31, is not the reason for it, but an unprecedented decline in global demand amid a pandemic.
The plan of Russia and Saudi Arabia, the two largest oil exporters in the world, which allowed to keep oil prices around $60 per barrel for over three years by limiting production, officially expires on March 31, 2020. A month ago Moscow and Riyadh were unable to reach consensus on extending the contract. According to the Russian Ministry of Energy, back in early March it was clear that the influence of coronavirus on demand would be so dramatic that any cuts under the OPEC+ charter that the Saudis insisted on would no longer make sense.
Russia’s position provoked a response from Riyadh, which in April promised to flood the already withering market with the maximum possible volume of additional oil. In anticipation of the "oil tsunami" from the Persian Gulf, Brent prices lost almost $10 in a month, dropping below $22 per barrel, which has not happened for almost 20 years.
The formal expiration date of the OPEC+ deal no longer affects investor sentiment, experts told TASS. "All plans have already been announced, events are developing in due course. Price reflects expectations, and they are all already formed," Finam analyst Alexey Kalachev said. On the contrary, oil may even rise in price briefly after March 31, "since the market may no longer takes this factor into account," he added.
The promises of Russia and Saudi Arabia to increase production since April no longer scare anyone amid an unprecedented decline in global demand, Saxo Bank analyst Ole Hansen said. According to Goldman Sachs, the coronavirus pandemic has reduced global oil consumption by 25% or 26 mln barrels per day. Against this background, the OPEC+ price war becomes secondary, Hansen added.
Nevertheless, Saudi Arabia can indeed increase oil production to the maximum levels of 12.3 mln barrels per day, which is about more than the level that the kingdom maintained while the deal was working by around a third, experts said. The Saudis can quickly accelerate production capacities this level before the end of April, Senior Director at Fitch rating agency Dmitry Marinchenko said. Other OPEC countries will also be forced to increase production, as they have sold future oil volumes even before consumption collapsed, Hansen added.
Experts question what will end faster - free tanks for oil storage or patience of shale oil producers in the US, for which low prices are unprofitable. "If Saudi Arabia seriously tries to increase market share by overflowing oil storage facilities, then production will soon have to be dropped not by them, but by those who have higher operating costs," Marinchenko said.
Narrowing demand will be fully provided by oil with the lowest cost, that is, from the Gulf countries, Kalachev said. "And those with lower profitability will be forced to leave and wait for the price to recover. However, by that time the market may structurally change," the expert added.
Hansen agrees that in the long run, tactics to gain market share by dropping prices may work. But the analyst still does not believe that Saudi Aramco will be able to maintain production level of 12.3 mln barrels per day in a situation where demand falls by 26 mln barrels daily.
In the meantime, all observers are unanimous in believing that oil will continue to fall in price amid a catastrophic imbalance of supply and demand. According to Kalachev from Finam, the market could fall to the range of $15-20 per barrel.
Either the news of a vaccine for coronavirus or a voluntary or involuntary oil production cuts by major manufacturers can stop the race to the bottom, Hansen believes. However, according to representatives of the World Health Organization, it can take at least a year to create an effective vaccine against the new virus, but it may take a less time to reach new agreements on regulating the oil market. The Kremlin’s press service reported on March 30 that Russian President Vladimir Putin held consultations with US leader Donald Trump. The leaders discussed the situation in the oil market and agreed to continue negotiations at the level of ministries.
