US, WASHINGTON (ORDO NEWS) — According to estimates of the last week, an event occurred on the oil market that shocked everyone. I calculated that over the past week the price of Brent crude oil rose by 38%.
Such an increase in just a week really made people scared, and it is not surprising that many partners who buy oil express concern. The rise in crude oil prices last week was because the market had expected the United States to cut production along with Saudi Arabia and Russia.
If this problem were resolved, it would become an event of historical proportions. A reduction in oil production by the joint efforts of the three leading oil producing countries would have an impact not only on oil prices in the current period, but also in the medium and long term.
However, due to the influence of such an agreement on reduction of production, it is naturally impossible to do without trade on favorable terms, as a result of which the process of negotiations at every stage is constantly interrupted by something. And just during the Chinese holiday of Qingming (the day of remembrance of the dead – approx. Per.) , The OPEC meeting was postponed from April 4 to this week, that is, just to April 9.
Why was this delay necessary? Everything is very simple: give a little extra time to everyone so that they play with their muscles and can come to an agreement.
Can the United States, Russia and Saudi Arabia play this game and finally reach an agreement? What agreement will be reached? But the interests of the parties are so confused that it is impossible to predict what the result will be, because the information is asymmetric. However, we should not pay so much attention to this process. We just need to think about the impact of various results. If we look at everything in terms of results, the issue of oil prices is actually quite defined.
Regardless of how long negotiations to reduce production take, there can be only three likely outcomes: a rejection of the agreement, successful completion and signing of the agreement, or negotiations will come to a standstill.
According to these three results, how can oil prices react? Let’s look at each of the likely scenarios.
1. Negotiations failed – oil price adjustment in the short term
First of all, if negotiations fail, oil prices will undergo adjustments in the short term. However, the absence of an agreement will not mean that oil production will not be reduced. In fact, if countries do not agree, then the volume of oil supplies will be determined by the market, then production capacities eliminated by the market mechanism will certainly become expensive.
In other words, if negotiations fail, production will still have to be cut. And the United States will have to determine the scale of the decline in production, since they have no other choice, because who, if not the Americans, has the expensive cost of extracting shale oil? From this point of view, this puts the United States at a disadvantage in these oil negotiations.
Of course, we can say that the United States has the opportunity to increase customs duties. That’s right, it is precisely this argument that Trump uses as a threat. However, if you increase customs duties, it will not reduce production volumes! With an increase in duties, if you export oil at an international price, you will not make a profit. Thus, domestic American oil companies will certainly not be able to export oil.
Under such circumstances, 6% of the output is lost. In addition, domestic demand under the influence of the epidemic situation is very low. If American oil companies want to maintain a price advantage in the US market after paying customs duties, they will have to reduce their production. Otherwise, in a situation of increasing customs duties and a desperate increase in production, duties will not be able to delay the fall in international crude oil prices and the establishment of low prices.
So, you see: even if negotiations are unsuccessful, a reduction in production will occur anyway, the only thing is that the speed of this process will not be as fast as with a successful conclusion of an agreement. In the current situation, the corresponding dynamics of oil prices is a short-term adjustment, later they will rise again with the news about the bankruptcy of American oil companies.
2. Successful conclusion of an agreement on joint reduction of production – good oil prices
Successful negotiations on a joint reduction in production will favorably affect oil prices, and prices will rise in a short time. If the United States finally agrees to join the agreement to reduce production, and Russia and Saudi Arabia – to reduce production, oil prices will continue to rise. The goal of price increases should be above $ 40. Why is that? Because it is at this level that American shale oil can hold on without causing loss. If this level is not achieved, what else will the US agree on? In this case, it is better not to agree at all and just expect a crash.
Nevertheless, the price of oil will rise, but it will not be able to cover all the reductions that have occurred immediately and return to its original position, since it will be limited by demand. Demand has fallen sharply, and if oil prices rise too high, it will decline even further. At least, China, the largest oil importer, will definitely not buy oil in previous volumes.
China can buy oil at a price of less than 40 yuan per barrel, because for the oil industry in China there is a line of defense in the amount of $ 40. However, if the price exceeds $ 40 per barrel, in the current conditions it will not be profitable for China.
Despite the fact that in the short term, it is likely that the price of oil will not exceed $ 40, in the medium and long term, especially after the end of the epidemic, the price of oil may exceed the cost before the epidemic. This may happen because this production reduction agreement will be the first agreement in the world between the three largest world oil exporters and will be a much more significant historical change than the second and third production reduction agreements signed before the epidemic. Therefore, it should not be underestimated.
3. Not only couldn’t come to an agreement, but negotiations have come to a standstill
The parties not only could not agree, but the negotiations reached an impasse. The United States, Russia, and Saudi Arabia blame each other and are called villains. And since there are only scoundrels around, it’s impossible to come to an agreement with them, and raising US customs duties will also not help the case, so what then?
Well, they are to blame, but how little Saudi Arabia dared to provoke and liquidate its production facilities, how can that be? Despite the fact that the US military was “isolated” by the epidemic, however, there is no equal in inciting others to fight the United States, can they not persuade several Middle Eastern countries? The probability is small, but it is possible.
You can say – what about Russia? Will it really not interfere with US plans? This is ridiculous, they are all oil-producing countries and are competitors who wish Saudi Arabia death. Not only the United States will benefit from this, but Russia will also take this opportunity with pleasure.
What happens if such a situation arises? This will affect 41% of global oil supplies. Although this scenario is the least likely, it will, without a doubt, be the biggest shock to oil prices.
So, in fact, it is very simple to come to these conclusions, and regardless of the success of the negotiations, regardless of the terms of the agreement, and what result the parties will come to, fluctuations in oil prices will change upwards, the only difference is when this happens . The oil market should be patient!
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