Is rebound in oil prices sustainable?

Some hopes were created on Tuesday after U.S. President Donald Trump and Russian President Vladimir Putin agreed to talks to stabilize energy markets, with benchmarks climbing off 18-year lows hit as the coronavirus outbreak cut fuel demand worldwide.

Trump and Putin agreed during a phone call to have their top energy officials discuss stabilizing oil markets, the Kremlin said on Monday. On this flimsiest pretext, oil prices are showing signs of clawing back from a near 18-year low.

Expectations were partly marred when crude oil benchmarks opened April mixed on Wednesday, following their biggest-ever quarterly and monthly losses, overshadowed by fears of global oversupply as data showed a bigger-than-expected rise in inventories in the United States. Brent futures were traded at US$26.14/barrel by 0032 GMT, while WTI futures were traded at US$20.75.

Opening session of today left oil prices marooned near their lowest levels since 2002 amid the global coronavirus pandemic that has brought worldwide economic slowdown and slashed oil demand. Crude futures ended the quarter down nearly 70% after record losses in March.

Added to the trauma was rise in US crude inventories, up by 10.5 million barrels last week, far exceeding forecasts for a 4 million barrel build-up, indicated by data from industry group the American Petroleum Institute.

Oil slumped to a 17-year low as coronavirus lockdowns cascaded through the world’s largest economies, leaving the market overwhelmed by plummeting demand and piling up crude inventories.

Physical oil markets are struggling to store fuel, hit by a double whammy of lockouts and shrinking demand. Western media is portraying it a war for market share between Saudi Arabia and Russia.

The world normally uses 100 million barrels of oil day, but forecasters predict as much as a quarter of that has disappeared in just a few weeks. The plunge in consumption is unprecedented. The great crash of 1929, the twin oil shocks of the 1970s and the global financial crisis don’t come close.

Global oil demand is in freefall and consumption may decline by as much as 20 million barrels a day, according to the International Energy Administration.

The bearish mood in the market hasn’t improved by a rift within the Organization of the Petroleum Exporting Countries (OPEC). Saudi Arabia and other members of OPEC were unable to come to an agreement on Tuesday to meet in April to discuss sliding prices.

It is very unlikely that OPEC, with or without Russia or the United States, will agree to production cut to contain global crude oil glut, mainly due to record production by the United States.

OPEC becoming subservient to US Shale oil producers

I will prefer to say at the outset that Saudi Arabia has become subservient to the US administration. Zionists, god-fathering Israel, have succeeded in creating the perception ‘Iran is a bigger threat.’ This has helped the US in soliciting arms orders worth US$350 billion.

Now, OPEC-led by Saudi Arabia, is being convinced to allow US Shale oil producers to increase their output under ‘mutual coexistence’. Both the Saudi decisions indicate that its foreign and economic policies have become subservient to the US.

The history of the relationship between OPEC and the US shale oil industry has evolved a great deal since the cartel discovered it (OPEC) has a monstrous rival eating up its market for around five years.

To convince Saudi Arabia to give more space, US bankers providing funds to Shale oil producers came to Vienna and key OPEC members are getting readying visit Texas in a bid to understand whether the two industries can coexist or are poised to embark on another major fight in the near future.

The complete surrender by the Saudi Arabia is evident from the statement of Khalid al-Falih, its Oil Minister, who said, "We have to coexist." One can recall that he pushed through OPEC production cuts in December, reversing Riyadh's previous strategy of pumping as much oil as possible and try to push US Shale oil producers out of business, by keeping oil prices low.

OPEC has already decided to extend a helping hand to US Shale producers, but keeps seeking supplies at a level to hold prices below $60 per barrel.

Some analysts believe that now OPEC realizes supply cuts and higher prices only make it easier for the shale industry to earn higher profit after it found ways of slashing costs.

Iran that has already consented to support Saudi Arabia justifies its decision. "For all OPEC members $55 (per barrel) and a maximum of $60 is the goal at this stage," said Bijan Zanganeh, Iran's oil minister. "This price level is not high enough to encourage too much shale? It seems it is good for both."

Some OPEC members seem keen to show they have shed any prior naivete about shale, making it a key topic during Thursday's meeting after barely mentioning it before. Shale's limitations, including rising service costs, also were discussed.

"We had a discussion on (shale) and how much that has an impact," said Ecuador Oil Minister Carlos Pérez. He expressed helplessness, "But we have no control over what the US does and it's up to them to decide to continue or not?"

"In terms of the threat, we still don't know how much (U.S. shale) will be producing in the near future," Nelson Martinez, Venezuela's oil minister said after the talk.

OPEC meets again in November to reconsider output policy. While most in the group now appear to believe that shale has to be accommodated, there are still those in OPEC who think another fight is around the corner.

"If we get to a point where we feel frustrated by a deliberate action of shale producers to just sabotage the market, OPEC will sit down again and look at what process it is we need to do," said Nigerian Oil Minister Emmanuel Kachikwu.