The OPEC Strikes A Crude Deal
The Organization of the Petroleum Exporting Countries (OPEC) establishes uniform policies that govern the petroleum markets of its thirteen members, culminating in a collective that manipulates nearly half of the world’s oil production.
Recently, however, the organization’s dealings with its allies have been fraught with conflict. In particular, Russia’s Energy Minister refused to acquiesce when Saudi Arabia demanded that the country slash its oil production in response to the ongoing pandemic [1]. An agitated Saudi Arabia responded by significantly increasing its own production, flooding the markets until the price of Brent crude (a type of oil that acts as a benchmark for prices) plummeted by 30% [2].
Concurrent to this breakdown in negotiations was a sudden uptick in coronavirus cases, creating a perfect storm that slashed demand for jet fuel, among other oil-based products. The shale industry within the United States was particularly devastated, as producers like Whitling were unable to cope with precipitating prices and shut down [1].
This fragile situation set the stage for one of the largest (in theory) oil deals in history. Despite a rocky start, during which Mexico refused to adhere to Saudi Arabia’s lofty demands [3], a deal between OPEC and its allies was signed on April 12th. In it, these countries agreed to cut oil production by 10% of the world’s overall oil supply [4].
The deal is quantitatively recording-breaking in its attempt to offset the sudden decrease in demand, but its implementation is riddled with holes. For one, millions of barrels of oil will continue to flow into the markets as countries scramble to put the deal into effect [4]. The dollars lost during this time interval will undoubtedly shatter firms, as suggested by the closure of American oil producers.
Even in the long-term, several issues threaten to undermine the deal. Most glaringly, there are countless questions about the pandemic that remain unanswered. Businesses are unaware of the impact it will have on consumer trends, as well as whether or not a lockdown will be reinstated after an initial removal. These factors may spur owners to reduce supply purchases, downsize, or shut down entirely. Thus, demand for oil may continue to decrease irrespective of production cuts [5].
On the level of the actors involved, it remains to be seen whether countries like Russia and Saudi Arabia will put the cuts in place. These countries have a notable history of circumventing OPEC rulings, and the earlier tussle with Mexico suggests that such circumvention could squash the entire deal [5].
Thus, while the OPEC’s attempts at staunching its virus-induced wounds are admirable, the reality of its past failings and future uncertainties remains a daunting opponent.
[1] : https://www.bloomberg.com/news/articles/2020-04-13/trump-s-oil-deal-the-inside-story-of-how-the-price-war-ended
[2] : https://www.ft.com/content/dab75720-618a-11ea-a6cd-df28cc3c6a68
[3] : https://www.spglobal.com/platts/en/market-insights/latest-news/oil/041020-mexico-rejects-oil-cut-deal-opec-to-regroup-for-talks-friday-sources
[4] : https://finance.yahoo.com/news/real-oil-market-drowning-opec-230000442.html
[5] : https://www.economist.com/finance-and-economics/2020/04/13/a-historic-opec-deal-to-curb-oil-output-faces-many-obstacles
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