WITH ‘crude’ endeavours to control, direct and distort the fundamentals in disarray, and the invisible hand finally at play, oil markets are set to face the harsh reality of market forces. For a change, demand and supply are ruling, underlining; there are limits to the influence, non-market factors could wield in the given scenario.

Despite some desperate attempts to forge a deal, the Organisation of Petroleum Exporting Countries (Opec) and its allies including Russia failed to reach an agreement on additional output cut this Friday.

The high stake game began on Thursday afternoon when Saudi Arabia led Opec proposed an additional output cut of 1.5 million barrels per day (bpd). This was to be in addition to the 2.1m bpd of cut already in place. As per the proposal, Opec was to cut output by one million bpd while Russia and its other non-Opec allies were to reduce output by another 500,000 bpd.

Moscow appeared adamant to sign on the dotted lines. Appa­rently, to bring Moscow under some pressure, Opec opted to announce the decision, even before their formal meeting with Russia on Friday. That backfired, ruffling feathers in Moscow. Some say it hurt the egos of the Russian crude masters. During their meetings, Saudi and other Opec ministers reportedly also conveyed a message to their Russian counterpart; if Moscow doesn’t join them in contributing to the additional 1.5m bpd cut, then Opec would abandon the cuts altogether. That also didn’t work.

Thus on Friday, when the Opec ministers formally presented the deal before their Russian counterpart, it was Moscow’s turn to return the compliments. It walked away.

Opec Secretary-General Mohammed Barkindo, speaking to reporters after the meeting broke up, conceded that there was no consensus to extend the policy of supply restraint beyond the end of March. The Opec would not act unilaterally, he emphasised.

Russian Energy Minister Alexander Novak, while leaving the meetings in Vienna on Friday, told the press that no agreement meant starting April 1, members could now pump what they liked.

“We have made this decision because no consensus has been found of how all the 24 countries, (the Opec+), should simultaneously react to the current situation. So as from April 1, we are starting to work without minding the quotas or reductions which were in place earlier but this does not mean that each country would not monitor and analyse the market developments,” he clarified, keeping the door for discussions open.

Only last July, Russia, and Saudi Arabia touted their ‘crude’ alliance as a marriage to “eternity.”

Yet, despite some behind the scene discussion being on, as claimed by Barkindo, the view that the couple may be on the verge of divorce is gaining ground.

This is a ‘free for all’ scenario — markets have spoken and prices are plunging.

Brent crude, the global benchmark, settled 9.4 per cent lower at $45.27 a barrel — the worst in nearly three years. In reality, this was the worst one-day percentage drop since December 2008.

WTI, the US oil, settled 10.1% lower at $41.28 on Friday — the biggest one day percentage drop since November 2014 and the lowest close since August 2016.

Demand destruction is playing havoc. As per the Opec, oil-demand growth this year would be just 480,000 bpd, down from a forecast of 990,000 barrels only last month.

Major Wall Street banks and consultancies are also projecting global oil demand, contracting in 2020, for only the fourth time in nearly four decades.

The International Energy Agency expects crude demand to decline in the current three-month period, the first quarterly decrease since the financial crisis.

Research firm IHS Markit predicted on Wednesday that oil demand will suffer its steepest decline on record in the first quarter — worse even than during the 2008 global financial crisis. The report said; oil demand will likely be lower than in 2019 — even if H2 2020 sees a recovery. IHS is forecasting global oil demand at 3.8m bpd lower than a year ago, thanks to coronavirus.

Rystad, too, revised its forecast on Thursday, estimating that oil demand growth will come in at 500,000 bpd for the year, down from 1.1m bpd that it estimated in February.

Opec is in a fix. In the given circumstances the task of keeping oil prices from falling further single-handedly remains virtually impossible for the Opec. The unravelling of the talks in Vienna also underscores the organisation’s declining power. Unlike the heyday of the 70s, it’s capacity for shock and awe is now very limited. Riyadh needs to understand it and well.

Published in Dawn, March 8th, 2020