Oil producers unite before the danger of "execution"

If implemented, the preliminary agreement of OPEC+ countries will allow to somewhat stabilize oil prices in the nearest few months, but it remains to be seen whether it will restore the balance of demand and supply in the market.

The agreement achieved by the majority of OPEC countries and Russia can be considered unprecedented. It means the reduction of oil production output by 10 million barrels per day during May-June 2020. Forecasts for the subsequent periods are quite optimistic, being made on the premise of assumed gradual restoration of demand: minus 8 million barrels per day during July-December 2020, and minus 6 million barrels per day during the period from January 2021 to April 2022.

These ambitious steps aimed to preserve oil prices became possible thanks to the concurrence of interests of leading oil producing countries, and that includes not only Russia and Saudi Arabia but also the United States and others, which fight the previously unheard-of economic turmoil. However, this agreement will take effect only with the consent of Mexico, whose representative left the OPEC+ videoconference. Efforts to convince this country to accede will be taken during today’s G20 Summit.

At the same time, even these steps might not be sufficient if restrictions imposed to combat the coronavirus pandemic will be extended and the global economy will continue to suffer from them. According to an assessment made by OPEC itself, the surplus of oil in the global market in the second quarter of this year may reach 14.7 million barrels per day. In other words, the reduction by 10 million barrels may not be enough to balance out demand and supply.

However, what oil producing countries are afraid of the most is the complete filling of existing oil depots. Even if the entire tanker fleet and all available storage reservoirs are utilized, they could be filled to the brim already this May. Under this scenario, unless further reduction of oil production is agreed upon, prices may drop to zero and even below zero – in other words, consumers will be paid to take that oil away.

That’s the “execution” which oil producing countries are trying to avoid, and therefore, chances that they reach an agreement are high. For petroleum importing countries, particularly Ukraine, this situation presents an opportunity to stock fuel on the cheap.

Oil refinery operators should think about taking advantage of this opportunity by temporarily turning their facilities into oil depots, and so should the government, which has at its disposal storage capacity of the State Reserve Agency and Ukrtransnafta’s oil reservoirs. After all, this is also an impetus to create a system of minimal stocks of oil and petroleum products as required by EU directives and the Energy Strategy of Ukraine.

Roman NitsovychResearch Director
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