Last week, oil prices were in free fall, but all it took was a simple rumor to stop the crash.
WTI was just a mustache away from under $ 50, and Brent was already in the high $ 50s. But on Aug. 7, Bloomberg announced that Saudi Arabia was considering deeper action to save oil prices. A Saudi official told Bloomberg that the Kingdom "will not suffer a long fall in prices and is considering all options."
The comments offered scant details, but oil was collected nonetheless. However, even as OPEC + takes further action, it faces an extremely difficult task and more than rumors will be needed to raise prices for an extended period of time.
Shale production in the United States continues to increase, although Permian delays are underway. The latest round of quarterly revenue from shale drilling machines has shown widespread financial stress, layoffs, operational challenges and investor prudence. Typically, extensive financial and operational problems would be a bullish sign for oil, as it would suggest that shale was intended to lower expectations, but installation problems did not help the raw material at all.
This is because demand is a pervasive problem at the moment, which makes the OPEC + challenge much more difficult. "We believe that oil options for key producers are limited at this time," Standard Chartered wrote in a note on August 8. "Unlike the price crises of 2014-15 and the end of 2018, the current crisis is not driven by rapid market imbalances."
The last few drops in oil prices came as US shale added large volumes of new supplies. During these periods, demand continued to grow at a rapid pace; just US shipments are growing even faster.
This time it's a little different. "Growth in US shale production has not the same momentum as in previous cycles, and OPEC production is at a 15-year level, falling 2.7 mb / d in the last nine months. In fact, we expect global stock picking up in the second half of the year, despite uneven demand growth, "Standard Chartered analysts write. "However, the market is driven by fears of an end result: a sharp contraction in world trade and GDP, accompanied by a decline in global oil demand." Related: Texas crude is getting better prices
The investment bank says OPEC + really doesn't have good options. The producer group cannot fix the market as the problems are "the result of policy developments in Washington and Beijing. As a result, "oil producers may be advised to stay away," Standard Chartered concluded.
It is unclear whether OPEC + will comply with this advice. Saudi officials clearly do not think that standing idly by is reasonable. But what happens next depends on whether the last price rebound turns out to be lasting or whether prices are reversing in a downward trajectory.
For now, we can expect 'imminent' action by OPEC +, but if oil prices sink deeper, the JMMC Joint Committee on 12 September "could be turned into an emergency ministry to faster and deeper cuts are being considered, "Rapidan Energy Group said in a note. But there is still no consensus on how to proceed.
The consultants said that OPEC + may need to be reduced by another 1 mb / d around the time when the current deal expires in spring 2020. However, this timeline may be accelerated if the macro environment continues to deteriorate. Related: Middle Eastern Oil, Car Manufacturers Face Very High Risk of Cybersecurity
This is an uneven calculation for oil producers. As Saudi Aramco revealed in its first interview with investors, in the first half of the year, the company reduced its net income by 12 percent due to lower oil prices compared to the same period a year earlier. If it adheres to the current regime, oil prices could fall further.
It seems Riyadh is afraid of lower prices than it is reducing production, but getting other manufacturers on board will not be a simple task. However, if OPEC + goes down further, then the Saudis may have to take the lion's share of the further reductions.
For now, jaw-dropping shopping in the business press is a kind of low-hanging fruit – prices go up a little without producers doing anything. But it is not clear that such a strategy will lead to lasting price increases, especially if the global economy continues to deteriorate.
By Nick Cunningham from Oilprice.com
More top reads from Oilprice.com: