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March 2020
Part 2. Oil Ministers gambles on oil market
On March 5, the OPEC held extraordinary meeting in Vienna, Austria. in December last year, ordinary meeting of OPEC and subsequent meeting with non-OPEC oil-producing countries, the so-called OPEC+ (plus), decided that the production level would be cut by half million B/D furthermore in addition to 1.2 million B/D cut of previous meeting. At the same time Saudi Arabia has announced to cut production by 400,000 B/D voluntarily. As a result, a total of 2.1 million B/D, equivalent to 2% of world crude oil production, diminished from the market. OPEC expected that the oil prices would rise.
However, production increase by shale oil & gas producers in US resulted in to offset the effects of OPEC+ production cuts (see U.S. Oil Production Trends (2017-December 2019)). And the global oil market faces the new enemy; coronavirus infection. China blocked Hubei Province entirely, but it has spread all over the world. The world economy has been paralyzed. Oil prices have plummeted due to both oversupply and weak demand.
Saudi Arabia has determined that OPEC+ should inevitably decrease oil production. They proposed an additional 1.5 million B/D cut in addition to the existing 2.1 million B/D cut. The plan requested OPEC member countries to cut 1 million B / D and non-OPEC countries such as Russia to cut 0.5 million B/D respectively. On March 5, OPEC officially announced that OPEC+ would implement an additional 1.5 million B/D cut by the end of June as proposed by Saudi Arabia[1]. It was odd that a second press release was issued on the same day that the production cut would be extended till the end of the year[2]. It is unprecedented for a press release to be issued twice after the OPEC meeting. It indicated the disorder inside OPEC. The series of decisions undoubtedly reflected the intentions of Crown Prince Mohammad bin Salman, the de facto ruler of Saudi Arabia. Petroleum Minister Prince Abdul Aziz bin Salman was worried by Crown Prince, and OPEC members were worried by Saudi Arabia.
Production cut announced by OPEC covered not only OPEC members but also non-OPEC alliances, such as Russia. Therefore, the conclusion at OPEC conference on Mar. 5th should be endorsed at the OPEC+ meeting on the next day. However, Russia had been negative for additional production cut because US has increased shale oil production during the cut of 2.1 million B/D by OPEC+. Russia thought that US has eventually benefited. From the beginning, Russia was against the additional production cut.
Russian Petroleum Minister Alexander Novak returned to Moscow to consult with President Putin when Saudi Arabia proposed additional production cut at a pre-OPEC+ meeting. Abdul Aziz bin Salman unilaterally decided to announce a further production cut by OPEC+ by the end of the year without consent by his counterpart Alexander Novak. Novak returned from Moscow to Vienna in the morning on March 6.
One month ago, King Salman and President Putin confirmed on a telephone call that the oil market should be stabilized[3]. Saudi Petroleum Minister Abdul Aziz bin Salman had no conception about Putin’s real intention. He was too simple-minded to believed that Russia would accept the Saudi proposal. Anyhow, his assertive manipulation at the OPEC meeting and lack of foresight might be the cause of the collapse of OPEC+ regime.
Together with the collapse of the OPEC+ regime and the uncertainty of the new coronavirus disease (COVID19), crude oil prices plunged under $ 30 per barrel. With no signs of economic recovery of the world, oil prices are unlikely to recover for the time being. Saudi Arabia, nevertheless, announced to reduce oil prices[4] and increase oil production[5]. Saudi Arabia has abandoned its role as a swing producer to maintain prices and changed its oil policy drastically. It is sure that Petroleum Minister Abdul Aziz bin Salman is a mere puppet that moves at the mercy of the Crown Prince.
In any case, Saudi Arabia has shown the intention to expel shale oil & gas producers in US from the market by lowering price and increasing production. But the damage against Saudi Arabia is fatal, too. It is a death match between the United States and Saudi Arabia. Prince Abdul Aziz bin Salman might move about in confusion in the game.
(Reference report) Saudi New Oil Minister: Prince Abdulaziz bin Salman (October 2019)
(To be Continued----)
By Areha Kazuya
E-mail: Arehakazuya1@gmail.com
[3] Saudi
Arabia's King Salman and Russia’s Putin agree to ensure oil market stability:
Kremlin
2020/2/3 Arab News
https://www.arabnews.com/node/1622371/saudi-arabia
[4] Saudi
Arabia slashes oil prices after collapse of OPEC+
2020/3/9 Arab News
https://www.arabnews.com/node/1638781/business-economy
[5] Saudi
Arabia ramps up oil production to record level
2020/3/11 Arab News
https://www.arabnews.com/node/1640036/business-economy
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