Picture: REUTERS/RAMZI BOUDINA
Picture: REUTERS/RAMZI BOUDINA

New York — The forecasts for oil demand are grim. Analysts from Goldman Sachs to Macquarie and commodities trader Trafigura estimate the peak hit to global demand will be anywhere from 8-million barrels a day to 11.4-million.

Consultancy IHS Markit says global oil markets face the possibility of the biggest crude surplus yet recorded. That is too big for any single producer, or small group of producers, to deal with alone. And it has become painfully clear that they have no appetite to do so anyway.

In the space of two weeks Saudi Arabia has gone from being threatened with legal action in the US for holding oil off the market to facing calls for legal action against it for flooding the market with it.

It is not lost on the kingdom’s leaders that the people who accused them of artificially inflating the price of oil by not pumping at capacity are the same ones who are now accusing the country of dumping crude since it opened the taps.

Don’t be surprised that it has no desire to ride to anyone’s rescue. No doubt it would only be pilloried again for pushing prices up as soon as motorists complain about the cost of filling their tanks.

We have all become too used to Saudi Arabia and the others in the Organisation of the Petroleum Exporting Countries (Opec) balancing supply and demand while the rest of the world pours cash into pumping as much as it can — even while destroying shareholder value on the way. Three years ago I suggested that US legislators should applaud Opec’s market management — now I’m going to argue that they need to go further and join them in it.

The virus-related demand destruction will pass at some point, and the time will come when the world will need everyone to be pumping again. It makes no sense to allow the shale industry to be hollowed out, and why should the US or other large producers expect someone else to sacrifice production when they are not willing to give up any of their own?

Soaking up crude by putting it back underground might bring temporary relief — if the US department of energy can find enough high-sulphur crude pumped by small American producers — but it will not be long until the strategic petroleum reserve is full.

Dealing with the oil crisis — just like dealing with the wider health and economic crisis — needs a joined-up international response and leaders worthy of that name to lead it.

The US, Saudi Arabia and Russia should agree deep, but temporary output restraint

Sadly, at the moment we seem to be locked into a cycle of finger pointing and tough-guy posturing.

Crown Prince Mohammed bin Salman, the de facto leader of Saudi Arabia, appears content with what my colleague Javier Blas described as a period of Darwinian survival of the fittest.

Russian President Vladimir Putin says he will not yield to Saudi “blackmail”. While Russia would like higher oil prices — what producer would not? — it is not prepared to act alone, or with a small group of other producers, to keep the rest afloat. Meanwhile, in the US, President Donald Trump is being pressed by some to consider an import tariff, or other sanctions, on Saudi and Russian crude.

But the time for playing the blame game is past. Whether Saudi Arabia and Russia did the right thing by initiating a production free-for-all, any solution has now gone far beyond both Opec and its wider Opec+ coalition.

On Thursday, Trump said he could intervene in an oil-price war between Russia and Saudi Arabia that has left US oil drillers reeling. The time to do so is now. Not by slapping trade barriers on their oil, but by using his deal-making skills to bring them together to agree a united response that includes the US and the rest of the world.

The US, Saudi Arabia and Russia — the world’s three biggest oil producers (by far) in that order — should agree deep, but temporary output restraint. Each needs to bring its allies along to share the burden. This should not become an open-ended Opec++ arrangement, but a one-off, time-limited agreement.

Signs of willingness

It will be painful for oil companies everywhere and there will be howls of protest. But the alternative is the death of the shale sector or, if taken to extremes, possibly even some kind of a war in the Middle East to halt supply.

While striking such a deal will not be easy, there are signs of willingness to help make it happen. The Texas Railroad Commission has signalled its readiness to be part of a solution. I’m sure other US states and Canada will follow.

Saudi Arabia and Russia have decided that high-cost producers outside the Opec+ group must finally share the burden of balancing the market — if they won’t, those high-cost producers may find they bear it all.

• Julian Lee is an oil strategist for Bloomberg. Previously he worked as a senior analyst at the Centre for Global Energy Studies.

Bloomberg

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