Article Shi Xupeng
Chief researcher, Australia China Relations Institute, University of science and technology, Sydney
Distinguished researcher of Yangtze River Industrial Economics Research Institute, Nanjing University
Shi Xunpeng, a distinguished researcher at Nanjing University's Yangtze River Industrial Economics Research Institute, said that negative oil prices and the resulting adverse impact could further accelerate cooperation between the United States and OPEC. Individual enterprises in the United States may also be more active in coordinating their positions with OPEC.
At the end of April 20, Texas light crude oil (WTI) crude oil futures for may fell to a negative value for the first time, reaching a low of - 40 USD / barrel at one time, closing at - 37.63 USD / barrel.
The negative price has multiple factors, the main reason is the imbalance between supply and demand. U.S. producers did not adjust in time to the slump in demand caused by the new coronavirus, squeezing inventory capacity. In addition, with the contract expiring in May, traders are faced with buying physical crude oil without storage capacity. To avoid this, traders were forced to close their positions in a hurry.
In addition to the factors directly related to the U.S. market, the oil market uncertainty caused by non market factors in the past two months has also played a superimposed role. On March 6, 2020, after the breakdown of negotiations between OPEC + and Russia on further production restriction, Saudi Arabia launched a unilateral price war. In less than two weeks, the price of Brent crude oil fell below $25 per barrel. However, when the world expects the price of crude oil to hover at the low price of $20 / barrel, on the night of April 2, US President trump tweeted that Saudi Arabia and Russia are expected to reach a production reduction agreement to end the oil price war. The original Brent oil price jumped to $36.29/barrel at one time. In the end, although OPEC + reached a historic agreement, it experienced a tortuous process, including Russia's denial of reaching an agreement, Mexico's unexpected refusal, and the US's rescue agreement at a critical time.
These extraordinary factors are a huge interference to market participants, which may be one of the factors that lead to the failure of us oil producers to respond in a timely manner. Many market participants inevitably hope that the biggest oil production reduction agreement ever reached between OPEC + and other oil countries, including the United States, on April 12 will boost oil prices. Unexpectedly, oil prices fell more than 20% in the following week. Despite the historic decision of OPEC to cut production in cooperation with the most likely United oil producing countries, it failed unexpectedly to prevent the decline of oil prices.
Finally, the US oil market has traditionally benefited from OPEC production cuts, which could also be a driver. With the development of drilling technology and shale oil in the United States in the past decade, the United States has become the world's number one oil producer again. As a "swing producer", US shale oil continues to fill OPEC's production reduction space, benefiting from OPEC's production reduction behavior in terms of price and volume. Do not rule out that some manufacturers have a fluke mentality and hope to gain profits from this historic production reduction agreement again.
This behavior of us shale oil also caused dissatisfaction of OPEC and Russia. Although analysts believe that Saudi Arabia's intention to launch prices in early March is to punish Russia for abandoning the OPEC + alliance, some analysts believe that sacrificing OPEC + is actually Russia's strategy to crack down on high-cost US shale oil producers.
This fall in oil prices has really hit the US shale oil industry. Whiting oil company became the first shale oil bankruptcy company. As US shale producers need to repay about $86 billion in debt over the next four years, their bankruptcy due to falling prices will have a significant impact on the US job market.
This market situation brought by shale oil development has also promoted the adjustment of US policy. The United States has historically been a staunch supporter of free markets. OPEC aims to coordinate and unify the oil policies among its member countries. Its open and regular price control runs counter to the spirit of free market. The United States also believes that this kind of oil cartel is a threat to the American economy. Especially when the United States is a net importer of crude oil, low oil price is conducive to the economic development of the United States.
With the substantial increase of domestic shale oil production, US policymakers increasingly need to avoid low oil prices in order to protect their shale oil industry and its related economy and employment. The interests of the United States and OPEC are finally the same in avoiding low oil prices.
The change of American interests prompted the cooperation between the US government and OPEC in this historic agreement. In addition to trump's own efforts to mediate disputes between Saudi Arabia and Russia, the United States has also saved the agreement by sharing most of Mexico's responsibility for production reduction.
Negative oil prices and the resulting adverse shocks may further accelerate cooperation between the United States and OPEC. Although the U.S. government cannot directly control the production decisions of oil companies and is unlikely to join the OPEC + alliance, the U.S. government and trump themselves can use their own influence to influence OPEC's decisions. Since trump was elected president of the United States in 2016, he has repeatedly interfered with the price of the international crude oil market with his own efforts, becoming a "trump factor" affecting the oil price. Individual enterprises in the United States may also be more active in coordinating their positions with OPEC.
If the United States cooperates with OPEC, it may harm the interests of oil consuming countries. China imports more than 500 million tons of crude oil in 2019. Any artificial market support will lead to an increase in China's crude oil import expenditure.
As the existing oil consumption group, the International Energy Agency (IEA), fails to reflect the demands of major emerging economies such as China and India, China can use platforms such as the G20 to unite with other major oil consuming countries to put forward its own reasonable demands.
Source: Yangtze River Industrial Economics Research Institute, Nanjing University
Note: This article was originally published in Xinhua Finance and Economics
Jiangsu Economic News
Micro signal: jiangsujjbs
Look at the world from the perspective of economy