By Myra P. Saefong, MarketWatch
An effort by the Organization of the Petroleum Exporting Countries to stabilize the oil market ended in failure on Friday, with Russia rejecting a plan for addition output cuts and sending prices for the commodity plummeting to their lowest levels in roughly three years.
Analysts said Russia may be betting that the lower prices will cause U.S. shale producers to slow output, but without OPEC+’s help to steady the market, U.S. benchmark prices could fall toward $30 a barrel as COVID-19 feeds a decline in demand for oil.
“Today’s outcome is psychological blow for the market, as the steep plunge in oil prices shows,” said Ann-Louise Hittle, vice president of macro oils at Wood Mackenzie, in emailed commentary Friday. “And the market is now facing the spectre of unrestrained production once the current OPEC+ agreement expires in March.”
OPEC on Thursday had proposed an additional output cut of 1.5 million barrels to the end of the year, under which OPEC members cutting 1 million barrels a day and Russia and other allied non-members responsible for a reduction of 500,000 barrels a day.
The talks ended without an agreement. Russian Energy Minister Alexander Novak said there is no more oil output deal between Russia, its allies and members of OPEC, according to a report from Reuters . He said that from April 1 and onward, Russia “nor any OPEC or non-OPEC country is required to make output cuts,” the report said.
The current OPEC+ agreement calls for a reduction of 1.7 million barrels, from an October 2018 baseline, through the end of March of this year. OPEC had also recommended extending that pact to the end of the year.
The failure to come to an agreement “represents the worst case scenario that could have happened,” said Manish Raj, chief financial officer at Velandera Energy. “The breakdown was a classic game theory outcome—each side stands to gain if the other side backs down. However, if neither side backs down, then they both lose.”
Raj said “Russia is certainly betting that price crash will cause U.S. production to crash, helping restore its dominance,” but that bet did not pan out well in 2014, when OPEC and Russia decided to defend market share instead of defending prices, “and only made the US producers more efficient thereafter.”
Total U.S. oil production climbed to a record 13.1 million barrels a day for the week ended Feb. 28, according to the Energy Information Administration .
Attack on U.S. shale?
U.S. shale oil and natural-gas drillers were under severe financial pressure even before the recent selloff in oil prices, said Ryan Fitzmaurice, commodities strategist at Rabobank. “Share prices across the exploration and production sector currently sit at or near all-time lows as a result of high debt levels, lack of free cash flow generation, and extremely poor investor sentiment with respect to the energy sector.”
Fitzmaurice said that Russia may be willing to “suffer through a period of low prices in order to deal a final blow to the US shale industry.”
Independent energy expert Anas Alhajji, however, argued that “the Russian position is illogical, even if they want to target shale [because] many shale producers are hedged”—reducing the risk of adverse price movements.
“If they go bankrupt, they comeback stronger with no debt,” said Alhajji.