Friday, July 3, 2020

Price war: Tense situation on the oil market: “Opec +” is struggling to find an agreement

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The aftermath of the corona crisis and the price war between Russia and Saudi Arabia have caused the oil price to plummet in the past few weeks.

Today, the Opec oil cartel, together with its cooperation partners («Opec +»), wants to offer a video conference to discuss the tense situation on the oil market. There are drastic production cuts in the room – provided that the United States will follow suit. This support, it has recently emerged, may be the crucial condition for «Opec +» these days.

Specifically, it is expected that «Opec +» will discuss a sharp cut in production of ten million barrels (159 liters each) of oil and more every day. Officially, however, Opec recently did not even announce the exact start time of the video conference. It will be exciting to see what share of the cut that «Opec +» wants to take on and which it expects from countries such as the USA, Canada and Norway. Iran’s oil minister Bijan Namdar Sanganeh confirmed on Twitter on Wednesday that other countries besides the 23 “Opec +” countries should also be involved in a deal.

The oil price has recently plummeted more than it has in decades. On February 19, the price of a barrel of the North Sea Brent was almost $ 60 – on April 1 it was only around $ 25. The drop in prices is, among other things, a consequence of the significantly lower demand due to the Corona crisis. In many countries, everyday life is more or less at a standstill, which means that significantly less crude or heating oil or fuel is used.

In addition, the «Opec +» members could not agree on a common strategy from April 1 at their last ministerial meeting in early March. The price of oil had already responded to the Corona crisis by slumps, and the «Opec +» meeting in Vienna took place under special security measures. But instead of a common strategy, the heavyweights Russia and Saudi Arabia announced a price war. Both sides announced an increase in crude oil production – and so sent the oil price down. Now the pressure to work together is even greater.

“The big question is whether the” Opec + “is already in advance without knowing exactly whether the other countries will really participate,” said Commerzbank analyst Carsten Fritsch. He assumes that «Opec +» makes aid from the USA a requirement – and would otherwise accept the current production surpluses. “Then it should be really serious for the oil price.” Already on Friday – under the chairmanship of Opec heavyweight Saudi Arabia – there will be a switch from the energy ministers of the G20 countries, in which fellow campaigners could also be won.

Fritsch believes that the recent cut of a total of ten million barrels of oil per day is just large enough to maintain the current oil price of around USD 32 per barrel (Brent). «You have to look at the starting level that will be set during the negotiations. Ten million barrels less than at the beginning of April would not be enough. After all, Russia and Saudi Arabia ramped up their production in the price war. »

A reduction in crude oil production of ten million barrels a day would correspond to about ten percent of total global production before the Corona crisis. The share of the 13 Opec countries in the global oil market has recently been a little less than 30 percent, together with the ten cooperation partners («Opec +») it is around 45 percent. The entire «Opec +» alliance is very much determined by the two heavyweights Saudi Arabia and Russia and therefore also depends heavily on their unity.

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