All Eyes on Oil Talks

All eyes will be on the Opec-led meeting to see if the world's biggest oil producers can break the deadlock and agree on global output cuts. The looming recession and the Covid-19 crisis have had a profound effect, slashing oil prices.

The meeting via video conference is reportedly due to take place at 16:00 Vienna time. Besides Opec's 13 member countries, the meeting will also involve Russia, Mexico, Kazakhstan, Oman, Azerbaijan, Malaysia, Bahrain, Sudan, South Sudan, and Brunei, who have been working with the oil cartel over the past three years to prop up oil prices, under the so-called Opec+ pact.

Another 10 major producers – Argentina, Brazil, Egypt, Indonesia, Canada, Colombia, Norway, the US, the UK and Trinidad & Tobago – are understood to have invited to the talks as observers. But many are yet to confirm their attendance. For some countries, the market is the preferred way of resolving any over- or under- supply, although these circumstances are exceptional. 

A deal will depend on Saudi Arabia, Opec's de-facto leader, and Russia, the biggest non-Opec producer in the Opec+ group, calling a truce in their supply war. Opec+ ended their co-operation in early March, prompting Saudi Arabia to slash prices and announce plans to ramp up production.

There are conflicting reports about who was to blame for the breakdown in supply talks. But it is understood that Saudi Arabia wanted to deepen cuts, which Russia refused to do. Saudi Arabia claims it increased its output to an unprecedented 12mn b/d at the start of this year, whereas Russia is pumping out around 11.3mn b/d.

However, an agreement may hinge on the involvement of the US, the world's top producer with an output of around 13mn b/d. Washington says it is maintaining a dialogue with Saudi Arabia in light of the market turmoil, but has been non-committal about cutting its own supply. Many indebted US shale drillers, burdened with production costs as high as $23.35/b according to the US Energy Information Administration, need a quick recovery in prices to stay in business. Many have costs that are much higher.

Saudi Arabia, on the other hand, enjoys production costs, including gross taxes, capital spending, extraction and transportation costs, as low as $8.98/barrel, Saudi Aramco's share prospectus shows. Russian oil, meanwhile, costs around $19.20/b, according to the International Energy Agency.

Russia and Saudi Arabia have issued tit-for-tat statements over the past week blaming each other for triggering the price rout last month. In reality, it is likely neither side foresaw at the time the real impact the Covid-19 pandemic would have on global oil demand – particularly for transport – which is expected to fall by between 15mn and 22mn b/d this month as a result of lockdowns across the world. While some animosity remains, the two exporters are keen to find a solution to avoid prices falling further. But neither want to see US producers capitalise on their cuts to production.

Nevertheless, the market seems to expect a deal. Brent futures were up by 3.62% at $34.03/b in early trade April 9, while West Texas Intermediate (WTI) grew by 4.78% to $26.8/b. The steps that oil producers take in the coming days and weeks will have a drastic ramifications for the gas market further down the line, affecting oil-indexed supply contracts.