Oil markets are facing their greatest moment of uncertainty in decades ahead of a virtual meeting of OPEC+ — the alliance of OPEC and non-OPEC producers — on Thursday, which was delayed from Monday over persistent disagreements and abrasiveness between some leading member states.
In the spotlight will be whether countries can agree to communally cut crude production in order to salvage plunging prices at a time when no one is buying oil and the world is running out of places to put it.
"Stalemate is not an option for any of the parties involved," Nansen Saleri, CEO of Texas-based analytics firm Quantum Reservoir Impact and Saudi Aramco's former head of reservoir management, told CNBC via phone on Tuesday. "It's only a matter of time" until some agreement is reached, he said, predicting "a matter of weeks as opposed to months."
"It's against everyone's interest to oversupply the world," he said. "There is a common element here, and that is that everybody is hurting."
It comes as oil prices are down more than 50% year to date, with global benchmark Brent crude trading at $31.94 per barrel Wednesday and U.S. West Texas Intermediate at $24.18 per barrel 9:00 a.m. ET.
The OPEC+ meeting will be held via video conference as a precautionary measure amid the coronavirus pandemic, which has obliterated global oil demand and all but shut down the world's major economies.
At the same, leading producers Saudi Arabia and Russia are engaged in a price war, increasing or maintaining production to grow their market share, while U.S. shale companies are pumping at record levels. Oil prices are at their lowest in nearly two decades, prompting massive capex and job cuts across the U.S. shale basin where high-cost operations are no longer economically viable.
But Russia and Saudi Arabia's market share strategies will be painful to sustain too, Saleri said. "The economies of Saudi Arabia and Russia are all being affected by the oil prices."
If Saudi Arabia and Russia are to cut their output — as President Donald Trump has called on them to — they want to see the U.S. play its part in cutting too. The tense dynamics of big egos and foreign relations among the world's heavyweight energy players will now determine the future of the entire global oil industry.
Everyone's skin in the game?
That now means not just OPEC+ producers, but also the U.S., Canada, Norway and Brazil. In the U.S., production levels are decided by individual companies, making a centralized cutting effort extremely difficult — and something that Trump has made clear he will not do. But even American executives are now calling for industry cuts, in line with market forces.
"Capacity has to come offline," Exxon Mobil CEO Darren Woods told CNBC's Squawk Box on Tuesday. "There will be economics that force producers to shut in... frankly because there is no demand for the product so eventually you've got to stop making it."
Exxon Mobil and Chevron are slashing their capex by 30%, mostly impacting operations in the shale-rich Permian basin of Texas, as are numerous other U.S. firms.
Such reductions mean an immediate impact on U.S. oil production, something that RBC's Helima Croft says might just be accepted by OPEC as equal to a cut.
"I think OPEC will try to barrel count these reductions," Croft, head of commodity strategy at RBC Capital Markets, said Tuesday. "Can you brand your capex a cut? I think OPEC will be flexible in terms of what constitutes a cut." This will likely be a focal point for the U.S. energy secretary when G20 energy ministers meet this Friday.
Even if a deal is reached, however, it may still do little to improve markets given the demand destruction wrought by the coronavirus pandemic, experts say.
'Low probability that a deal can be reached'
"We are assigning a low probability that a deal to cut production can be reached," Edward Bell at Dubai-based bank Emirates NBD wrote in a report Wednesday. "The positions of the main actors, notably Saudi Arabia and Russia, have not changed." Saudi Arabia is refusing to take on the heaviest cutting burden as it's done in the past, and rhetoric between the two has worsened.
A prior deal over production cuts between OPEC and non-OPEC members led by Russia in March collapsed when Moscow refused to agree to Riyadh's terms, setting off the U-turn in Saudi policy and a race to pump more crude to more customers.
An agreement on Thursday will need to be in everyone's interests, but lower-cost producers Saudi Arabia and Russia may not even have an incentive to cut their production, argued Chris Midgely, head of analytics at S&P Global Platts.
"If cutting production just supports the back of the curve" — eventual price increases once demand recovers — "and not prompt buying, then there is little incentive for Russia or Saudi to cut production," Midgely told CNBC, if they're already winning market share.
Saleri, the former Aramco executive, disagrees. Egos and stubbornness aside, the current trajectory will inevitably smash into a physical wall.
"Global capacity to hold oversupply is limited... everything is filling up," he said. "Oil is not going to find any place to go."
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Expectations for an oil deal remain low ahead of crucial OPEC+ meeting - CNBC
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