With the latest round of coronavirus-inspired lockdowns in various parts of the world, OPEC could face its biggest challenge yet: further reduce production. Would the cartel and its members survive such a decision?
OPEC originally planned to ease the current round of production cuts from January. And for now, that plan still holds. But OPEC members and analysts have spoken that it could implement the plan, extending the cuts beyond January 2021 until an indefinite future date.
The reason for the possible extension of the current round of cuts is OPEC’s perspective on oil demand, on which all plans – budgets, production plans, austerity measures – are based.
And if the new round of lockdowns in various parts of the world is any indication of future demand for oil – and oh, are they ever – OPEC needs to seriously consider the possibility that its plans to ease production cuts will be scrapped. .
The current lockdowns threaten the very fabric of the oil industry, and some oil and gas companies have not survived the latest round of lockdowns and declining demand. It is very likely that more oil and gas companies will fail to do so.
Austria starts on November 3 its last lock. Under the new orders, residents must stay at home during the hours of 8 p.m. to 6 a.m. – until the end of November in a desperate attempt to stop the spread of the virus. Hotels must close and restaurants and cafes will close – all of this will profoundly affect the demand for oil. For Austria, it gets most of its oil from Kazakhstan – a member of OPEC + – while its gas comes from Russia.
Last week, France implemented his second lock too, and this time around, it is expected to last until December 1. Under these measures, people are allowed to go to work only, in addition to purchasing essential goods and attending medical appointments. One of the most notable restrictions here is that travel between regions is prohibited and must remain within a mile of their homes – a rule that is sure to eat away at oil demand for the country which draws most of the gas. its oil. Saudi Arabia and Norway. Related: Venezuela’s Oil Industry Is On Its Last Legs
Next on the list is Germany, which entered another lockdown on Monday. Germany has strict travel restrictions and all non-essential travel is prohibited. According to AGEB energy market research groupGermany’s energy consumption is expected to drop 10% this year – for crude oil in particular, Germany is considering a 3% drop, according to AGEB. Germany’s biggest oil supplier is Russia, the de facto leader of the positive side of OPEC +. The UK and Portugal are also on lockdown again, with the UK lockdown starting on November 5.
With these lockdowns and possibly more to come, will this push oil demand down to levels that will create even more glut – and a headache for OPEC? And if so, can OPEC members’ budgets take another blow from the ugly combination of falling oil prices caused by the glut and fewer barrels produced from which it can generate revenues. income?
The answer is complex. Most OPEC members are heavily dependent on oil revenues – some almost completely. And there have already been rumors from disgruntled members who have indicated – unofficially, of course – that they won’t be on board in January if OPEC comes knocking on the door and asking for an extension of the already painful quotas it suffered today.
Disgruntled countries that reluctantly cut back on production as a duty they have to perform include Nigeria and Iraq.
OPEC and Russia – or more likely Saudi Arabia and Russia – appear to be in favor of extending the cut. It is said this week that they are considering the possibility of postponing their January plan to ease the cuts. Oil prices rose on the mere rumor of such an event on Tuesday, but OPEC members are probably less enthusiastic.
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The reasons are clear. Efforts to diversify the economy in OPEC member countries are slow in coming. Their budgets are inextricably linked to oil revenues, and on Tuesday the Energy Information Administration (EIA) predicted that OPEC members’ oil revenues will fall this year to the lowest level in 18 years – a result of both prices low oil and declining production. Collectively, OPEC members are expected to earn $ 323 billion in net oil export revenues this year, up from $ 595 billion last year, the EIA added.
Aramco reported third-quarter profit on Tuesday, but it was 45% lower. It’s painful, but Aramco announced it was keep your dividend. This dividend goes mostly to the government – 98% of it, in fact – and the fact that the dividend is held while profits fall 45% is a definitive indication that the Saudi budget needs this revenue for it. wreak havoc.
Ultimately, even if some countries feel more pain than they can handle, Saudi Arabia and Russia are likely to pull the strings as usual. If both deem it prudent to extend current production cuts beyond January, the rest of OPEC + will likely fall in line – painful as that may be.
By Julianne Geiger for OilUSD
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