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ECONOMY > Energy

Editorial: Make efforts to stabilize crude oil prices with further production cuts

  • May 7, 2020
  • , The Japan News , 12:54 p.m.
  • English Press

The crude oil market is in turmoil. Oil-producing countries should work together to make efforts to stabilize prices in order to prevent the damage from extending to the global economy.

 

Crude oil futures in New York, which had reached $60 per barrel in January, plummeted to about $20 in March. On April 20, prices went into negative territory for the first time in history.

 

In this situation, no buyer can be found even if prices reach zero, and the seller has to pay the buyer to take the crude oil. It is nothing less than extraordinary.

 

In the New York market, when the settlement date is reached while a seller holds crude oil futures, it is necessary to take back spot goods. Speculators looking for a profit margin usually do not expect to take them back.

 

As settlement dates approach, stocks have piled up due to a drop in demand caused by the spread of the new coronavirus. It seems that crude oil was dumped at lower prices as there was no space in crude oil storage facilities. Although the prices made a U-turn into positive territory, they are still hovering at around $20.

 

It was oil-producing countries themselves that triggered the plunge in crude oil prices. In early March, negotiations between Saudi Arabia and Russia, two major oil-producing countries, broke down over coordinated production cuts aimed at shoring up prices. However, they even expressed their intention to ramp up production instead.

 

Their move for a production increase, which aimed to take control of the crude oil market by expanding their share, worked against them. Even though the spread of the infectious disease was an unforeseen situation, the drop in prices must be described as their own fault.

 

Falling crude oil prices greatly benefit consumer countries such as Japan, but could shake up financial markets. If oil-producing countries withdraw oil money from the market due to their deteriorating fiscal conditions, that could lead to falling stock prices across the world.

 

There is also a fear of shale oil-producing companies in the United States collapsing one after another. Japanese companies and household budgets would inevitably be hit if financial unrest spreads globally due to ballooning losses of funds for corporate bonds and financial institutions that lend money.

 

The governments of each country should keep an eye on price developments and the impact of price falls.

 

The problem is how to stabilize crude oil prices.

 

On April 12, a group of countries called OPEC Plus, which consists of the Organization of the Petroleum Exporting Countries (OPEC), including Saudi Arabia, and non-OPEC member countries such as Russia, agreed to a reduction of a record 9.7 million barrels per day.

 

However, the decrease in demand due to the infectious disease is expected to approach 30 million barrels per day. Additional coordinated production cuts are required.

 

The absence of the United States, the world’s largest oil producer, as part of the group has also weakened the effectiveness of the production cuts.

 

Unlike Saudi Arabia and other countries where oil production is under state control, it is difficult to force private companies to refrain from producing crude oil.

 

However, this case is an emergency. It is hoped that the United States and other oil-producing countries, including Canada, will cooperate in reducing crude oil production.

 

— The original Japanese article appeared in The Yomiuri Shimbun on May 6, 2020.

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