With OPEC crude oil production declining by 560,000 barrels per day to 30.5 million barrels per day in February, international oil prices began to rebound gradually. WTI crude oil prices broke 57 dollars a barrel again. US President Trump once again called on OPEC to relax its efforts to raise crude oil prices. The contradiction between OPEC+and the United States about oil price is intensifying day by day.
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U.S. Oil Faces Internal and Foreign Troubles with Increasing Production
In October 2018, the U.S. SUNRISE crude oil pipeline was put into operation, and the bottleneck of U.S. crude oil transportation has been improved to a certain extent. As a result, U.S. crude oil production continues to increase. Since 2019, U.S. crude oil production has risen steadily, reaching an all-time high of 12.1 million barrels per day in the week of February 22.
However, at this stage, the U.S. crude oil market still faces two problems: one is oil mismatch. Shale oil, as the main source of increasing crude oil production in the United States, produces light crude oil, while medium sulfur crude oil is still the main refinery equipment in the United States. Although heavy and light crude oil can be produced by mixing, the United States still needs to import heavy crude oil to meet domestic demand. Second, capital recovery. High attenuation rate is a major feature of shale oil production. Oil companies mostly maintain production through new drilling, and the capital is mainly supported by Wall Street financing. The book Saudi America by American journalist Bethany McLean reveals the fact that most of the oil companies involved in shale oil exploitation are trapped in increasing oil production, but their cash flow is always negative. Although some large oil companies made profits in 2018, the shale oil industry as a whole still needs to expand its market to maintain its current level.
Since the United States began to export large-scale crude oil in 2015, “energy independence” has become the mainstream trend of the United States. Although the net import of crude oil in the United States has been decreasing, the heavy crude oil in the United States still needs to rely on Canada, Saudi Arabia, Iraq, Venezuela, Mexico and other countries. The dramatic reduction of Venezuela’s crude oil production has also made it difficult for the United States to import heavy crude oil. Meanwhile, Saudi Arabia has cut its heavy crude oil supply to the United States. The decreasing supply of heavy crude oil has further stimulated the sensitivity of the United States to high oil prices. On the other hand, under the circumstances that it is difficult for the United States to adjust the demand of refineries on a large scale in a short period of time, the output of light crude oil is increasing and difficult to digest. As a result, American crude oil is facing the external problems of importing large quantities of heavy crude oil and the internal worries of excess domestic light crude oil.
As a net importer of crude oil, the United States wants to expand its market share in the global crude oil market, but oil prices and transportation costs are major constraints. Therefore, the United States hopes that oil prices will fall further, which will not only alleviate the pressure of domestic oil mismatches, but also bring back funds for oil companies to maintain production, and save costs for purchasing heavy crude oil, so as to obtain greater operating space.
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Resolutely Reduce Production and Guarantee Financial Security in Saudi Arabia
As the largest producer among OPEC member countries, Brent oil prices of $65 per barrel at this stage are also unacceptable. Saudi Arabia’s budget increased by 7% to 1.106 trillion rials in 2019, equivalent to about $295 billion. According to the report, in order to maintain the deficit at $35 billion, Saudi Arabia expects to produce an average of 10.2 million barrels per day in 2019 at a price of $80 per barrel. But now production and oil prices are far below Saudi expectations. Saudi Arabia has cut production to 9.8 million barrels per day ahead of schedule in an attempt to further rebound oil prices under the OPEC+cut-off agreement.
In order to maintain oil prices and exports, Saudi Arabia has also made large-scale overseas investment. In February, China Weapons and Panjin Industries signed an agreement with Saudi Arabia and the United States to establish Huajin Ami Petrochemical Co., Ltd. with a total investment of over 69.5 billion yuan. It is expected to start production in 2024. Saudi Arabia is trying to ensure its future crude oil exports by establishing joint refineries overseas. Faced with huge fiscal deficits, Saudi Arabia urgently needs oil prices to rise to more than $80 per barrel, which is also the main reason why it actively calls for OPEC + to further reduce production.
Opinions differ. Russia is hard to choose.
Russia’s attitude towards reducing production is somewhat contradictory. From the repeated discussions on output reduction at OPEC + meeting to the failure of the reduction to reach the agreed scale, all kinds of signs indicate that Russia has been hesitant about the reduction. The president of Rosneft, a Russian oil company, is a typical example of his unwillingness to cut production. He told Russian President Putin that OPEC and non-OPEC production cuts were “in the hands” of the United States. Russia is facing a decline in oil market share. The OPEC agreement is a strategic threat to Russia’s oil industry. The Russian government is more supportive of production cuts. Russian energy minister Nowak said on March 4 that Russia plans to speed up oil production reduction this month and will reduce production by 228,000 barrels per day at the end of this month compared with last October. Putin also made it clear that he believed OPEC + production reduction agreement would help stabilize the oil market.
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The core of Russia’s internal disagreement can be attributed to the government’s desire to consolidate its alliance with OPEC, while enterprises are worried about their declining market share. In the face of the fierce US, heating with OPEC is an important means to maintain its market position, but the decline in market share caused by the reduction of production will also cause irreversible harm. Faced with this dilemma, Russia’s attitude will largely affect the future direction of oil market development.
In short, for their own core interests, the United States, Saudi Arabia and Russia, the three major oil producers, have very different expectations for production, of which the contradiction between the United States and Saudi Arabia is almost irreconcilable. As the biggest variable, whether Russia will resolutely reduce production or delay in the future will be the key factor to eventually leverage the oil market. We believe that OPEC + will not discuss further production cuts until the June meeting, before which Russia may continue to maintain a state of “inadequate production cuts”. As a result, WTI oil prices will remain between $53 and $62 a barrel in the next three months, and Brent oil prices will remain between $64 and $72 a barrel.
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