Risk level: RED
RED: Severe (+/- 4%) ORANGE: High (+/- 3%) YELLOW: Elevated (+/- 2%) BLUE: Guarded (+/- 1%)
THE BOOSTER SHOT
- OPEC+ arrangement a victory in rhetoric only.
- Energy Intelligence forecasts swift declines outside the OPEC group.
Looking at US hegemony as the effort to contain the spread of communism collapsed in Vietnam in the mid-1970s, Henry Kissinger expressed concern about mission creep in an interdependent world. He said that issues like energy, the environment and population all rank alongside issues like national ideology and military security, adding more items to the traditional focus of the diplomatic agenda. This shows that national concerns in an interdependent world are more and more diverse, and the dense connections inherent in this type of system makes prioritizing national objectives difficult. And so it was with one of the most complex oil production arrangements in modern history. All parties to an agreement that extends well beyond OPEC+ can claim victory with a weekend production deal, but it may be a victory in rhetoric only.
Brent crude oil prices fell 7% last week even amid prospects of a grand bargain meant to support an oil sector already dealing with casualties. A firm position from the Mexican government held up the agreement at the last minute, though global oil ministers in an extraordinary Easter Sunday discussion managed to coordinate to sideline 9.7 million barrels per day through May and June. That, however, was short of the 10 million bpd mark tabled last week and far below the upper limits recommended by some. Fatih Birol, the head of the IEA, said 10 million bpd would still leave a 15 million bpd glut in the second quarter.
“I go with the consent, so I agree,” Saudi Energy Minister Prince Abdulaziz bin Salman said during the weekend, gaveling in an arrangement that was weeks in the making.
The Mexican government of a nationalist President Andrés Manuel López Obrador balked at a proposal to cut some 400,000 bpd from down-and-out oil company Pemex. Mexican oil production topped out at some 3.4 million bpd in 2004 and has declined every year since then, and credit rating agencies have put Pemex at near-junk status. As with US producers, the Mexican energy sector is under enormous pressure in current market conditions and AMLO may have felt there’s nothing more to give. He suggested the United States may shoulder some of the burden, though the 3 million bpd gap from the initial target level of 10 million bpd indicates there’s nothing formal in the arrangement.
Market analysts largely shrugged off the prospects of a return to January levels of around $60 per barrel, with the US Energy Information Administration trimming some $10 per barrel from its most recent forecast. Abhi Rajendran, the research director at Energy Intelligence, told The GERM Report the arrangement is no panacea.
“It gives oil prices the privilege of perhaps staying in the 20s/30s instead of plunging further,” he said. “April is still an extremely challenging physical market, and the OPEC cuts need to have very high compliance to be effective, which is unlikely to be achieved come May 1.”
Outside of the formal OPEC+ group, he added, supply cuts and shut-ins “will come fairly quickly.”
US Energy Secretary Dan Brouillette acknowledged during the weekend that US production was not subject to formal commitments. US shale had perhaps already passed its zenith during the fourth quarter as legacy production levels dwindle, according to the EIA. That shows that any decline from the US energy sector is largely a result of technical factors rather than coordination across a crowded playing field. Washington may be able to claim a win after badgering Saudi Arabia for alleged mistreatment and hammering Russia with repeated sanctions, though all parties walked away with claims of victory.
“We believe that this deal helped to prevent the oil markets from slipping into chaos and is now helping to maintain more or less stable price dynamics,” Russian presidential spokesman Dmitry Peskov told reporters on Monday.
Saudi Arabia, for its part, signaled no end to an oil price war that added insult to injury during the demand destruction caused by the coronavirus pandemic. After the meeting, the kingdom slashed its Official Selling Price to Asian customers, according to S&P Global Platts.
The US position in the run up to the deal reveals the Carter Doctrine – which coupled national security concerns to the oil market – remains relevant. As US production rivaled, and eventually overtook, Saudi Arabia and Russia, the Trump administration set its sights on becoming an energy superpower. Led by US Sen. Kevin Cramer, a Republican from shale producer North Dakota, US lawmakers even on Saturday complained that the strategic relationship with Saudi Arabia was dependent on calling a cease-fire to the oil price war.
“While we appreciate them taking the first step toward fixing the problem they helped create, the Saudis spent over a month waging war on American oil producers, all while our troops protected theirs,” Cramer said in a statement on Saturday. “That’s not how friends treat friends,”
Kissinger in 1975 wrote that “old international patterns are crumbling” and the fate of nations may hinge on the ability to coordinate along multilateral lines. Looking back at thirty years of global dominance and forward to a new age, Kissinger noted the globalized world created overlapping national priorities. “The world,” he observed,” has become interdependent in economics, in communications, [and] in human aspirations.” Critics of the interdependent order worry that coordination along multiple lines leaves the lowest, not the best, common denominator as the point of agreement. As interdependence becomes more ingrained, there’s a concern about the ability of the government to manage all of the interconnected issues, such as the connection between the US economy and its national security relations. In their 1977 analysis, Power and Interdependence, Robert Keohane and Joseph Nye stated that these overlapping issues “make a nightmare of global organization.” This may be true too when considering organization among major oil producers. Add to that the Marxist observation that capitalism works until someone cheats, and someone always cheats, the weekend OPEC+ agreement might not be the dream come true that many expected.
US Federal Reserve officials will be weighing in on the impact of COVID-19 across the American economy on Tuesday. With layoffs in the oil sector spreading outside of the United States into Canada, a rate decision Wednesday from the Bank of Canada may be indicative of the severity of the economic crisis among major producers. The seminal Beige Book from the US Fed is also out on Wednesday. Thursday brings another reading of the level of unemployment in the United States, and there may be a severe lack of ‘help wanted’ signs out there. Thursday also brings first quarter GDP figures for China, which will show how bad the economy was hit at the height of the COVID-19 outbreak. The week ends with Japanese industrial production data and the Baker Hughes rig count. Until this thing is over, the Red alert remains in force, with Brent expected to move by at least +/- 4% on the week.