The recent Doha meeting of major oil producers failed to agree oil output freeze deal and confirmed the existence of deep disagreements within OPEC.
The oil prices agony continues as major oil producers failed to reach an agreement on production freeze at the long-expected meeting in Doha on April 17.
The expectations surrounding the meeting had fueled hopes that the 20-month long slump in oil prices might finally be over and led to a partial recovery in oil prices. But it now seems that the period of low prices is not over yet.
Brent crude fell more than 5% on 18 April, to $41 per barrel, and WTI crude by 7%, to $38 per barrel.
Brent Crude (Price per barrel)
Lack of results
The key point of disagreement arose between Iran and Saudi Arabia. Riyadh refuses to make any concessions to its regional arch-rival, who seek to increase their oil output to pre-sanction levels.
The Doha failure reflects long-standing disagreements between the two Persian Gulf powers over regional supremacy and conflicts in Syria and Yemen. It also confirms the fact that OPEC, and Saudi Arabia, lost their ability to act as a global swing producer, which puts the 56-year-old Cartel's existence and purpose into question.
In practice, however, the meeting would not change much in terms of global demand and supply. The participating countries were discussing capping oil production at their current almost record high levels, which still leaves the markets well oversupplied.
The oil glut
There are signs, however, that the oil glut is slowly starting to wear off. The contango effect - which occurs when the current price of a commodity is lower than prices for delivery in the future - is not as severe as it was only a few months ago. In addition, supply disruptions in Iraq, Nigeria and Kuwait, along with slowly decreasing production in the US and other non-OPEC countries will help to support the prices at $40 levels.
But in order for price to go up significantly, more cuts are needed in the future. Apart from temporary disruptions, the only foreseeable reduction might come from non-OPEC producers and the US, where the non-conventional shale production, which currently makes up around half of the US total oil production, is slowly declining under pressure from low prices.
At the moment, total US production hovers slightly below 9 million barrel per day, which is a drop of 600,000 barrels per day from its peak in June 2015. The decrease is likely to continue due to unsustainably low prices and increased difficulties for US producers to maintain previous investment levels by obtaining bank loans and tapping the US capital markets.
The total amount of outstanding debts and obligations of the energy sector toward US banks reached $123 billion in February, while 59 companies filed a bankruptcy since the beginning of 2015. This trend is likely to continue. On the other hand, improved productivity and cuts in capital costs would make the shale sector more resilient, and prevent a sudden slump in oil production.
This is bad news for other oil producers, from Russia to Angola, whose finances are already under severe strain. If current prices become the new norm for the oil markets, most oil producers will be forced to run budget deficits within the next five years.
Source: Harvard Business Review
The immediate consequence of the inevitable budget cuts will cause significant pains for their economies. But over the long term, it will force the highly oil-dependent countries to adapt and diversify their economies.
Countries with high foreign currency reserves have better chances of successfully achieving this, but the majority of developing oil exporters are not in such a position. For them, the prolonged continuation of low oil prices could produce strong economic, political and social crises with unpredictable consequences.