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Do Oil Producers Have Any Price-Boosting Options Left? 5 Possible Strategies

Published 04/15/2020, 06:35 AM
Updated 09/02/2020, 02:05 AM

On Sunday, OPEC+ came through with a big agreement to cut 9.7 million bpd of oil, while other producers are supposed to provide further cuts. The agreement was hailed as “historic,” due to the large amount of oil the organization agreed to cut from supply starting in May, but the oil markets had a different perspective.

Oil markets were closed on Sunday when the announcement was made and many markets remained closed on Monday for Easter Monday, but oil prices did not rise as a result of the agreement. In fact, they dropped later in the week, revealing the lack of confidence the markets had in last weekend’s big cut announcement.

WTI Futures Weekly Prices

Do producers have any tricks left to try and raise oil prices? Let’s look at some possible strategies, even the most unlikely.

Blame Game

Try to restore the markets’ confidence in producing countries by blaming the current leadership and removing them for their positions. Russian president Vladimir Putin could replace his energy minister, Alexander Novak, but there is no sign that he is disappointed with Novak.

Saudi Arabia’s King Salman could blame his oil minister (and one of his sons), Prince Abdulaziz, who led the policy to overproduce and lower prices in early March. Likewise, the OPEC body could blame the current OPEC Secretary General, Mohammed Barkindo, and fire him.

If presented to the markets as a correction in leadership and policy, it could help raise prices a little and stabilize the situation. There has been more blame placed on Saudi Arabia for the current situation due to its early march decision to increase production to 12 million bpd, so blaming and firing Prince Abdulaziz might restore some of the lost confidence in Saudi Arabia’s commitment to oil price stability.

Create Military Tension

Create a military tension or a conflict in an oil-producing region. This move isn’t guaranteed to raise prices as tanker seizures and sabotage in the Persian Gulf region haven’t done much to elevate prices in the recent past, but in theory it could raise prices.

In fact, on Tuesday, a Chinese-owned tanker in the Gulf of Oman heading to the port in Jubail, Saudi Arabia was reportedly boarded by armed persons and steered towards Iran.

However, the incident did not spark any notice from markets, because they were preoccupied and the vessel was apparently released a short time later. However, the incident should remind traders that the same political and military tensions that existed before the coronavirus catastrophe are still at play.

Increase Global Storage Capacity

Major producers (and possibly importers who want to buy for storage) could collaborate and push to drastically and quickly increase global storage capacity. Producers could work with importers to facilitate which construction of new storage facilities, in conjunction with favorable deals on oil purchases to fill them.

Countries like the U.S., Russia, China, India and Saudi Arabia have the ability to do this. Building storage facilities, especially in importing countries like China and India, could help increase demand numbers for May, June and further as well as alleviate fears of a forecasted oil storage crisis that have been weighing on oil prices.

Imported countries would only do this if they get a very good deal on the oil, but it may be worthwhile for producers to show increasing global demand. The point is not so much to make money immediately, but to improve demand numbers.

Self-Sacrifice

One or more major autocratic producers make a sacrifice. A sacrifice from one or more of the top producers could shock the markets intro higher prices if it entailed another 2 to 5 million barrels cut for each country participating. This situation would have to come from a country that is legally able to mandate cuts nationally through a centralized office.

That would be a country like Saudi Arabia, Russia or Iraq. It is an unlikely scenario, and one that would only come out of desperation for a country that needs to see higher prices and demonstrate its own power over the markets.

But such a country would suffer while its competitors benefited, and no one wants to do that. Furthermore, given the markets’ lackluster response to Sunday’s cuts, it would be a risky move.

Note: this option would not be like the scenario in which Venezuela has been forced to drastically cut its production over the last few years. While several producing countries are set to face budgetary problems in the coming months, there is no indication any of them are under the threat of imminent Venezuela-type economic collapse.

Force an End to Lockdowns

Finally, producing countries could push for the major consuming nations to declare an end to the policies that have kept their economies locked down. These policies, designed to mitigate the spread of coronavirus, have been destroying oil demand as billions of people have stopped commuting, working, manufacturing and travelling.

This might run contrary to the advice of some medical and epidemiological professionals, but there are plenty of experts these producing countries could draw on to support a quick return to economic life.

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The Only Options

These are the options remaining for desperate producers. One and a half months ago, no one expected prices to be this low. If they don’t recover soon, the producer’s problems will only get worse. National budgets will be slashed, debt will pile up and layoffs will increase. Otherwise, they can wait and pray.

Latest comments

This is a great question and your response shows more than sufficient clues on what producers need to do. Market needs to see the cut that is well-managed and concrete, similar to the 1980’s cuts that brought confidence back to the market. IEA has released its report without any reference to what the United States and Canada are going to do. Saudi Aramco cuts heavy grade crude for Asia and then Russians do the same for their Asian customers. Market thinks that Opec plus has taken them for a ride. There’s no firm commitment by any of the producers.
build more storage is just a temporary solution for surplus. what happen when then storage is full?u ask to lift up lock down is just to run the economic but what for a wealthy economic country if half if citizens died of covid19?u can blame the leader for taking this such action especially Saudi increased production since March but do u think that decision is one man decision?as PhD please be more rational dr
Funny and hypotetical
I have a question. when it comes to oil cuts why isn't USA part of the equation? since they are the largest producers. I am new to following the oil industry and will love to get some insight. maybe some links to research papers explaining how the oil market operates. the role USA plays and all the oil exporting nations.
USA should join the stabilization act with OPEC+ in some way.  She is the largest producer now.  But the Law prohibits US government to regulate production in general.  We run a free market economic policy.  And technically, there isn't a fair way to enforce production cut.  Any financial damage, like bankruptcy, can stir up $Billions and $Billions liability law suit. So offering some incentive for voluntary cut back, may be one workable option. Should any company that takes the money to cut back and then go chapter 11, can't sue the money giver.
If it's difficult to enforce production cut, then how about a voluntary one, by setting up a fund to assist shut in cost and revenue loss, like the one in farm land rest program, to stabilize the industry ?
how will the fund work? a voluntary cut may not happen since the trust level between opec+ nations is not great. Russia for instance does not follow the protocols of the cuts historically
I thinks it more to supply and demand. There are lockdown all around the world, plane grounded, the demand is very low. I have no idea why they pumping too much oil for in current situation.
Ellen, good thoughts, none of it will happen, except maybe some emergency builds of storage facilities, but that takes a few months, and by then too late. In reality, the market (as usual) will determine supply numbers. As reserves fill up, the only choice is to stop producing, else the oil spills onto the plains of Texas. And with IMF now calling "depression" -- you can be sure WTI will likely fall to $10 far sooner than it climbs back to $35.
Diversification. Stop burning millions in natural gas and sell it, for Christs sake!
I have been saying that for years!!!
What about cutting oil productions and selling oil in storage......
it's not that easy, oil pumps don't work like water. if u thirsty u open the tap and u drink n when u done u close it. oil holes needs weeks to shut down due to the high pressure oil is coming out with, plus it will cost tons of money to get it flowing again so its a loose loose situation
Ever wonder how much it would cost to buy every marginal barrel of real oil produced in the world for the duration of  month? The answer is its affordable for some during normal times. So oil prices can and have always been fixed by the futures markets forever. The question i ask myself is whether there is a play for producers in the US to consolidate shale operations. I think there is something like 6000 independent producers so it serves some strategic thinking for the price of oil to be kept down more than for clearing inventories
Military intervention is not unlikely given not only oil, but also the US political landscape that nearly ensures re-election during massive military build up regardless if the general population agrees
thank you!!
You are not mentioning the fact that producers go bankrupt. That is what will happen and it will drive price up if the bunch go broke.
Wash out the weak. The strung will survive
eliminate competition n noone will challenge u or question u again
You don't think the banks will still do there best to keep the wells running?  The only way they get any money is to keep the oil flowing.  And as stated well elsewhere, one can't just shut an oil/gas well down.  But eventually market forces will shut the wells (and the companies) down .
Free market, virus restricts movement. Until virus is gone demad wont increase and it might never come back to old time increasing demand. This might be the end for profitable oil companies. Bye saudi aramco.
Simple: Oil producers will have to make further production cuts( according to demand) in orden to obtain their price goals. Its a dinamic process.
The only option is to outlaw all electric cars, like mine and that won't happen. Electric car manufacturing is only going to skyrocket from here.
for producing electric car you need energy, where does it come from, solar energy? batteries damage Earth same or even worse than crude
A big salute!!! But these strategies are most unlikely practical.
Dr. Wald I really appreciate your insight because you analyze and think inside and outside the box.
5 very unlike events in the short term, direction ....South... unfortunately
At this prices maybe not south, just sideways
What is the reason for oil-producing nations not being able to cut production if this would help prices? Is it due to unemployment for those working in the oil industry? Or, is it to maintain production running at a minimum to satisfy global demand?
Interesting. I had the same question as CoinToss1. Could ou please point out some link? I searched but found nothing satisfactory on the subject.
I will like the link to your comment as well Ji Go.
Get a book on reservoir management.
Time to cut US production of oil by 30% and put Tariffs on Russia and S. Arabia for their price war.
Due to anti trust laws, US cannot cut production, the 7000 producers must do it by their own and this only happen with low prices.
Give us gas for free, thanks.
Force and ens to lockdowns? Ok
A tank of gas every 6 weeks isn't helping.
Excellent thoughts ! Must happens
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