Oil deal needed to balance market

Dubai - Saudi Arabia to hike oil output capacity for first time in years; Russia still open for discussions

The UAE said on Wednesday that it would boost oil output to over four million barrels per day from April in a move seen quite critical in the escalating price war kicked off by Saudi Arabia in the wake of a failed bid by Opec and allies on Friday to reach a deal on deeper production cuts.
The output hike decision declared by the state oil company Adnoc falls in line with a similar move taken by Saudi Arabia to boost output to 13 million bpd - for the first time in more than a decade - in a standoff with Russia, which refused to toe the Opec line of further cutting output in order to balance the oil market and support price.
The UAE's decision to boost supply came in the wake of a call by UAE Minister of Energy and Industry Suhail bin Mohammed Faraj Faris Al Mazrouei for a new agreement between Opec+ country members to support a balanced and less volatile market.
He said, via a series of tweets: "Opec and Opec+ played an important role in delivering market stability. The UAE Ministry of Energy and Industry firmly believes that a new agreement is essential to support a balanced and less volatile market."
Al Mazrouei noted that operators in the country have "ample production capacity that will be quickly brought online given the current circumstances."
"We are disappointed that no agreement was reached by Opec + and the current declaration of cooperation will therefore expire at the end of March 2020," the minister's tweet read.
Dr Sultan Ahmed Al Jaber, CEO of Adnoc Group, said the oil giant is in a position to supply the market with over four million bpd in April. "In addition, we will accelerate our planned five million bpd capacity target."
Dr Al Jaber said Adnoc would shortly announce forward prices for the months of March and April 2020 "in response to market conditions, and to provide better forward visibility to our customers. This decision has been made to ensure that our customers have visibility of the price so they can plan accordingly".
He said Adnoc remains firmly committed to moving from its current retroactive pricing mechanism to a new forward pricing mechanism for its flagship Murban crude oil.
Also on Wednesday, energy giant Saudi Aramco revised upward its output hike by one million barrels per day to 13 million bpd from a previously announced 12 million bpd, chief executive Amin Nasser said, adding that the move was ordered by the energy ministry.
"The company is exerting its maximum efforts to implement this directive as soon as possible," Nasser said.
The latest Saudi decision came a day after the world's top exporter decided to hike production by at least 2.5 million bpd to a record 12.3 million from April, and prompted sharp new falls in world prices. The extra oil the two Gulf allies plan to add is equivalent to 3.6 per cent of global supplies and will pour into a market at a time when global fuel demand in 2020 is forecast to contract for the first time in almost a decade due to the coronavirus outbreak.
Oil prices have almost halved since the start of the year on fears Opec states would flood the market in its battle with Russia after Moscow refused to agree last week to deep production cuts in a pact that has propped up prices since 2016.
By raising supplies, the UAE and Saudi Arabia will add a combined 3.6 million bpd of extra oil in April to a market already awash with crude, compared to their existing output that is limited by the pact with Russia that expires in March.
Adding to that, Moscow has said Russian oil companies might boost output by up to 300,000 bpd and could increase it by as much as 500,000 bpd.
"The falling out between Saudi Arabia and Russia, whose alliance has helped brace oil prices for the past three years, will now lead to a price war pushing oil to multi-year lows," said Névine Pollini, equity analyst at Union Bancaire Privée.
Pollini said the immediate pain would be felt by the US shale industry, with shale oil being too expensive to extract and most companies in the sector heavily in debt. Insolvency among shale oil producers could become a problem.
"We believe the oil market is facing a lethal combination: too much global oil production coupled with slowing global economic growth," Pollini. Russia said supporting prices simply helped boost costlier production in the US, whose output has surged above that of Saudi Arabia and Russia. Russia indicated on Tuesday it was ready for more talks, but Saudi Arabia said there was little point if fresh discussions simply confirmed their inability to reach a deal. Brent was trading at about $36 on Tuesday, off this week's low of about $31 but 45 per cent lower than at the start of year.
According to market sources, Saudi Arabia has privately told some market participants it could raise production to well above 10 million bpd. even going to a record 12 million bpd".
"Russia refused to cut its output. Being a diversified economy it can afford an oil price as low as $42 to rebalance its budget. This unprecedented situation is different for other, mono-exporting economies like the Gulf countries and Saudi Arabia, which requires a price of at least $80 to balance its budget. As for oil-exporting countries that are already struggling, such as Iran and Venezuela, this price collapse could cause social unrest and political crises to flare up," explained Pollini.
Opec, IEA slash forecasts
Meanwhile, Opec chopped on Wednesday its forecast for oil demand this year on the impact of the coronavirus impact and warned it may do so again.
In its latest monthly report the Organization of Petroleum Exporting Countries lowered its forecast for global average daily demand by 0.92 million barrels to 99.73 million barrels.
That sees average daily global demand still rising by 60,000 barrels per day, but Opec said: "Considering the latest developments, downward risks currently outweigh any positive indicators and suggest further likely downward revisions in oil demand growth, should the current status persist."
The US Energy Information Administration (EIA), meanwhile, said global oil demand is expected to dive by 910,000 bpd in the first quarter, it said on Wednesday, as the rapid spread of coronavirus has slammed economic activity and travel, raising the specter of a global recession.
Oil prices plunged by the most in nearly three decades on Monday as top producers Saudi Arabia and Russia began a price war that threatens to overwhelm global oil markets with supply even as demand has slid.
- issacjohn@khaleejtimes.com