Publications: Notes at the Margin

The Oil Market's Dilemma (November 30, 2020)


Oil-exporting countries will confront a crucial dilemma when they meet virtually this week. Some of the problems they face are known and widely discussed. Additional critical issues cannot yet be quantified but could pose a real threat to prices by early next year. What’s worse, the meeting occurs in the midst of what can only be described as a period of "irrational exuberance," to borrow a phrase from Alan Greenspan's 1996 speech.


There are five known problems for producers. Global consumption remains depressed, probably requiring the producing countries to maintain current output constraints rather than increase production. US output continues to surge, surpassing twelve million barrels per day in the week ending November 20, 2020. Officials in the UAE are chafing under the constraints imposed by OPEC and seek to abandon the organization. Nigeria, deep in recession, demands that its production allocation be adjusted. Likewise, the Iraqi finance minister has stated that his country will no longer accept a "one-size-fits-all" approach.


If that is not bad enough, the global oil market faces three unknown challenges. The Trump administration's scorched earth economic policy threatens to push the United States into a recession in 2021, one that will depress oil use. The surge in Covid-19 infections has spiraled in Europe, leading Chancellor Merkel and others to call for ski resorts to be closed, an indication that the worst may yet be still to come. Finally, many Americans blissfully celebrated Thanksgiving last week, ignoring calls from the Centers for Disease Control to stay home despite US hospitals having reached capacity in many areas. This disregard of CDC advice could lead to a catastrophic failure of the US medical system, causing a short-term collapse in US economic activity. The most trying times for the US and oil markets may still be ahead.


In short, uncertainty reigns in global health, economies, and oil markets. The deteriorating situation with the virus and the world economy warns that producers may need to make further output cuts. One can only wish the ministers good luck on this.


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