Oil prices continue to tumble following the failure of Opec+ to reach a deal on more production cuts to counter the threat to the global economy. This raises an important question - To what extent can Opec avoid a further freefall in oil prices?
The answer depends on how oil-producing countries deal with what has always been a thorny issue, and which had not been placed on any country’s economic agenda until now.
Despite last week’s initial agreement by Opec members to cut output by 1.5 million barrels a day, to be added to the Opec+ deal of a previous reduction of 2.1 million barrels. This means the total cut would have reached 3.6 million barrels per day and helped stabilize oil prices at around the $60 a barrel mark.
However, Russia’s strong opposition undermined efforts to reach a final agreement, putting Opec countries in real trouble and contributing to the fall in the prices that reached $35 per barrel by the end of the week.
Prospects for more drops
Obviously, there are differences among top producers to hinder reaching a new deal and renewing the previous one, which expires by the end of this month. It means that prices may continue to nose-dive to their lowest levels.
However, some factors will play a role in determining the course of prices. The most important is reaching a deal within Opec and halting taking measures to increase demand for energy sources, especially oil, despite the overhang of the virus threat.
This includes demand from factories and various modes of transportation. But if Opec fails to reach an agreement and the COVID-19 virus continues to spread, oil prices will reach new lows never seen since the 1998 decline. All of which will cause further economic difficulties for oil-producing countries.
A time to backtrack
This scenario may force the world’s top oil producers to reconsider their previous positions and call for a new meeting to reach an agreement on production cuts, especially since such an agreement, particularly between Saudi Arabia and Russia, had helped keep prices relatively high, at above $60 over the past four years.
Besides that, if prices do fall below $30, this will disrupt many of the US shale oil fields, which currently produce 6 million barrels per day, and contributing to the withdrawal of at least 500,000 barrels per day and thus support price stability.
Forget the bluster
Without excluding speculations and political tensions, all these scenarios are quite possible, especially the possibility of reconsidering the stated position of major producing countries. Even though some oil ministers reckon that “the current price is suitable for their countries’ economic situations”, the truth is that all oil-exporting countries have a pressing need to keep the price at $50 plus, at a minimum, to avoid potential economic crises.
This is the only way for producing countries to avoid joining the increasing number of coronavirus-infected “victims” from around the world. Apart from the human factor, there are companies and businesses that are seriously affected. Last Thursday, UK domestic airline Flybe declared bankruptcy and suspended all its flights, affecting thousands of bewildered travellers.
Therefore, the logic of collective interests will impose itself on Opec+ countries and encourage them to reach a deal that benefits all.
Arrogance is useless and will make everyone, without exception, suffer serious losses. Such an attitude does not sit well with countries that enjoy a reputation in the global community and requires them to put reason above all other sentiments.
- Mohammed Al Asoomi is a UAE based specialist in energy and Gulf economic affairs.