Global Oil Producers Face Brutal Reckoning After Epic OPEC+ Fail

  • Date: 07/03/20
  • Bloomberg

The alliance between Saudi Arabia and Russia was the only thing that kept the world oil market from tumbling into the abyss. Now its collapse threatens to plunge the industry into a generation-defining freefall with few precedents in modern history.

OPEC+ ministers left a fractious meeting in Vienna Friday afternoon with no deal to continue restraining output, raising the specter of a price war just as the coronavirus triggers a drop in demand that could end up the deepest since the 1980s.

“This is going to get nasty,” said Doug King, a hedge fund investor who co-founded the Merchant Commodity Fund. “OPEC+ is going to pump more, and the world is facing a demand shock. $30 oil is possible.”

The market reaction Friday was as vicious as it was swift. Brent crude, a global benchmark, fell 9.4%, the most since the global financial crisis. The spiral may not be over. Previous collapses in cooperation between OPEC nations since 1960 have triggered punishing slumps that shaped the industry for years.

“This is an epic fail,” said Bob McNally, founder of Rapidan Energy Advisers LLC.

The fate of the meeting was sealed when Saudi Arabia and other members of the Organization of Petroleum Exporting Countries threw down a gauntlet Thursday, proposing an additional 1.5 million-barrel-a-day production cut for the rest of this year — but only if Russia would join. Moscow, which had been arguing for less drastic action, held firm.

Fundamental Disagreement

The meeting exposed a fundamental disagreement between the two countries, previously so close that their relationship was recently described as a marriage. Moscow was content that the coronavirus-induced drop in demand would push prices lower, a body blow to the U.S. shale industry. Riyadh, whose economy is less adaptable to low prices, disagreed.

There may still be time for reconciliation. OPEC nations said the door was open to further talks.

“We need to give Russia some more time and hopefully they’ll come back,” said Suhail Al Mazrouei, United Arab Emirates’s energy minister.

But there didn’t seem to be much indication of that from Russia’s Alexander Novak, who left the meeting saying there would be “no obligations to cut output” from April 1.

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