COVID-19 has wreaked havoc on global oil markets for three months. The pandemic wiped out a third of demand during April alone, sent US prices into negative territory for the first time and forced a rethink about what will be the new normal for the next two years.
The pandemic also caught OPEC and non-OPEC nations flatfooted in March. While the two titans of the OPEC+ alliance, Saudi Arabia and Russia, wrestled in Vienna about how much to take off the market – 600,000 barrels or 1.5 million barrels a day – events quickly rendered those calculations obsolete.
But as Albert Einstein said, “In the midst of every crisis, lies great opportunity.”
Got a whiff of reality
Like the rest of us who have adapted to the virtual world with on-line tools to communicate, the 24 members of OPEC+ are looking like a rapid strike force. There is less debate about when to convene a meeting at OPEC headquarters and the focus has shifted instead to practical policy measures.
They were forced into action as oil prices spiraled to record lows. In April, they cut a record 9.7 million barrels a day, nearly 10 per cent of global supplies. Seeing the persistence of the downturn, on June 6 they convened a second meeting to rollover the cuts through the end of July.
Crisis creates flexibility
“The new video conferencing format has indeed allowed us to be significantly more flexible,” said Russia’s Energy Minister Alexander Novak. “We can get up very quickly and pretty much make any decision without the difficult process of gathering a formal, physical meeting.”
OPEC’s standard protocol was to make a collective decision that would last six months unless an emergency meeting was required. During COVID-19, the oil market has been more dynamic with wild prices swings, plus supply and demand changing month-to-month.
The group is pulling in real-time data on automobile driving statistics, the restarting of flight schedules and tanker traffic, which all influence demand for energy.
At the same time, OPEC+ is adopting a similar approach with the media, convening a virtual press conference after their latest decision, that brought together Novak, Saudi Arabia’s Minister of Energy, Prince Abdulaziz Al Saud, the rotating President of OPEC Algeria’s Mohamed Arkab, and OPEC’s Secretary General Mohammed Sanusi Barkindo.
Ways to do it
Prince Abdulaziz, who has been serving the Kingdom at OPEC for just over three decades, recalled less efficient times during the 1980’s, when meetings shifted to venues all around the world that could last up to a month. His two predecessors, Ali Naimi and Khalid Al Falih changed all that, and today’s pandemic allowed him to take it to the next level.
“I think the two of the past two months provide you with an exemplary way of how we look at OPEC+ and how it conducts itself, which in many ways is bordering on what central bankers are doing these days,” said Prince Abdulaziz.
It was a lesson originally learned during the global financial crisis of 2008-2010, when large banks were teetering on the brink of bankruptcy and there was no time to waste organizing financial bailouts and interest rate policy face-to-face – conference calls became the norm.
Prince Abdulaziz went so far as to call former US Federal Reserve Board Chairman Alan Greenspan his hero for the work he did during the 1990’s in the era of globalization.
Can’t keep on carrying holdouts
The Saudi and Russian ministers are aware of the challenges that lie ahead, most notably to get all the producers to adhere to their production targets. Coming into the latest meeting, the data showed that Iraq and Nigeria were well off the mark.
OPEC sources said Prince Abdulaziz took it upon himself to correct what was a long-standing practice of cheating amongst the group.
"Most of us and the whole world oil market has no stomach whatsoever for any type of laxities," he said.
While he said that talks can be “rough and tough” when billions of dollars are at stake, the Saudi prince underlined the candor shown by those who were not meeting their obligations, who then pledged at the virtual gathering to make up for lost ground in August and September.
Behind the scenes, there is also the outsized role that US President Donald Trump has played since the signing of the OPEC+ agreement. He persuaded Saudi Arabia and Russia to drop their price war in March, which led to the radical cut in April.
US Energy Secretary Dan Brouillette said the latest move came at a “pivotal time” to restore balance to the market, which in turn supports American shale producers.
It’s all part of today’s new normal. Oil giants Saudi Arabia and Russia are frenemies; Donald Trump is actively involved with his use of Twitter, and OPEC+ has gone virtual.
“Be it virtual, in Vienna or Timbuktu, it makes no difference. The difference is the quality of the decision-making process,” said Prince Abdulaziz.
- John Defterios is Emerging Markets Editor at CNN Business.