Oil producers of the world are faced with grim choices

The oil-producing countries of the world will be looking to find a way out of the price fall caused by the global pandemic, at the OPEC (The Organization of Petroleum Exporting Countries) meeting to be held this month. This meeting will be an opportunity to reassess the situation and work on strategies as major consumption countries have begun to reopen gradually.

They have two choices ahead of them – either bring down the production cuts which can lead to overwhelming the global storage capacity and increased time for the market to rebalance or continue with the existing production cuts until the prices increase. But the latter choice also brings the added risk of losing market share and re-entry of the shale producers from the US.

The situation has definitely improved since April with barrels being traded at almost $33. The opening of Europe and the US has added to the demand greatly especially in road transport and shipping.

“Today’s price reflects optimism in the market, but further upside will most likely be limited due to higher oil stocks and logistics constraints in US supply, leading to some discounting. Demand is partially recovering, as people return to cars, but other areas such as aviation will see much longer U-shaped recoveries.”

The freight rates had increased to almost $200,000 per day at the heights of the crisis but have fallen back to $50,000 now. The fear of exhaustion of global storage capacity has also abated.

Apple map data suggests that the motorists are back on the roads and are increasing demand. In Britain, road traffic has doubled since the peak of the lockdown. In Beijing, traffic congestion is back to the pre-pandemic level. The US, the largest consumer of oil in the world, is opening more states, creating a steady increase in demand. But in comparison with pre-COVID-19 days, the scenario looks bleak with the demand down by 17 million barrels a day year-on-year in the second quarter.

Among the OPEC nations, Russia and Saudi Arabia have decided to continue coordination after a telephonic discussion between its leaders. Saudi Arabia had recently decided to do whatever it takes to rebalance the market and to slash another 1 billion barrels from its daily production in June.

Russia, however, is predicting a balanced market by June or July indicating that it is looking for the production cuts proposed by OPEC to reduce soon. In fact, Russia saw an increase in its shipments to China by nearly 18% while Saudi Arabia was met with a decline in shipment by 18%.

If Saudi Arabia, Russia and other oil producers decide to continue with the production cuts, it would mean a revival for the US shale that is temporarily on hold due to Covid-19. The US Energy Information Administration reports a 65% drop in the rigs operating in America and most of its workers joining the increasing number of unemployed in the country.

Though the easing of lockdown in countries across the globe brings an increase in demand, OPEC will have to make some tough decisions as the world learns to live in the new normal.