ABSTRACT
The global oil market is going through an extraordinary period. The twin shocks of a significant increase in global supply and a remarkable fall in oil demand appear to have no parallel in history. Together, the collapsed OPEC+ agreement and the coronavirus outbreak have put OPEC and the value of its role in the market back into the spotlight. As KAPSARC has previously studied and written, OPEC’s ability to measure and offset oil market shocks through the use of its spare production capacity has been a substantial stabilizing force, perhaps reducing oil price volatility by as much as half. However, the scale of the current disruption is too big for OPEC to rebalance the market alone.
https://www.kapsarc.org/research/publications/the-world-needs-opec-but-opec-cant-go-it-alone/
OPEC can only balance the market when it is the dominant low lifting cost swing producer. On the basis of US EIA 2019 production numbers (so before Saudi Arabia turned on the taps) OPEC only makes up 44% of global production but more crucially when half the top ten producers are non-OPEC members it only take one, Russia, to pull out of OPEC+ to change the market dynamic.
The USA have managed to obtain a free ride since they become the worlds #1 producer but have been increasing vulnerable to an eventual dash for market share - which is what Saudi Arabia have now done by directly taking on the financially distressed US and Canadian unconventional oil and gas production.
When the world's oil storage capacity becomes completely full it will get really interesting - as currently only 24% capacity remains and every scrap of floating storage has already been chartered that is coming quickly estimated by Rystad Energy at within two months. Then daily production will have to match a daily demand that is currently down 15%+ as there will nowhere to put excess production.
Ironically US producers are petitioning their State regulators to use previously unused production curtailment powers as I write this. Perhaps teh USA should ask to join OPEC? That was a joke by the way.
We went through this several times and OPEC is still alive and needed. But it needs cooperation from other producers
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