Tension Among Oil Producers Mount as Production Cuts Are Discussed
April 6th, 2020
The OPEC + meeting that was supposed to take place today has been pushed back and expected to take place on Thursday. There are many headlines and comments about who is to blame and why, which just tells us all of the complexity of this situation. The pressure surrounding all of this is very high. There is still a lot of uneasiness and tension between the parties and both Saudi Arabia and Russia have said they will not cut production unless other countries outside of OPEC+ also cut production. The countries they are looking at specifically are Norway, Canada, United States and Brazil. Both Norway and Canada have said they will consider production cuts, but Brazil and the United States have not.
The coronavirus has cut demand substantially and some estimates say the oversupply for April could be nearly 23 million barrels. The IEA and other forecasters have said that a cut of 10 million bpd would not be enough to overcome the demand destruction caused by the coronavirus. The estimates are varied but some are now as high as 26 to 30 million bpd and a few as high as 35 million bpd.
The producers have a lot of work to do to come to some consensus on cutting production but still the big unknowns are how long do these lock downs continue and what does demand look like as we transition out of them.
The market traded lower in overnight trading once the news of no meeting today hit the wires. Price are not down as much as many had thought. But the market will stay on top of this story as it develops.
The situation continues to bring tough times for energy producers. The Baker Hughes Rig Count Report said that oil rigs declined by 62 to a total of 562 oil rigs. There are also plenty of news reports of capital expenditures of oil companies being cut and many layoffs and job losses in the oil patch. Here is just another example of these reports as Phillips 66 announced that it had shut down one of its two cat crackers at its Borger, Texas refinery and a crude unit as its Ponca City, Oklahoma refinery and they will shut down a second unit this week due to poor demand due to the COVID-19 virus.
The huge price decline and demand destruction will lead to more and more reports of refineries being shut down or scaled back. It will also lead to more rig declines and production decreases. This type of action along with the return of demand will be the driving force to support prices again. At this point the timing of all that is still very unclear. But it is fair to assume that things will deteriorate more before this happens as many reports are stressing this week could be the worst week with respect to the spread of the virus and its death toll.