On June 8th, Dr. Sara Vakhshouri spoke on Bloomberg to discuss the OPEC+ cut extension and U.S. shale production. Dr. Sara Vakhshouri is founder and president of SVB Energy International, a strategic energy consulting firm with offices in Washington, D.C. and Dubai. She is also an Adjunct Professor of Energy Security at The Institute of World Politics.
In this segment, Dr. Vakhshouri stated that the OPEC+ cut extension gives the market more confidence as the political fragility of the deal has been removed on the demand side for another month. Dr. Vakhshouri stated that even though the OPEC+ cut extension will have a marginal effect on the market, it still remains important for the market. She emphasized that it is important to understand the extension from the OPEC+ countries’ perspective. The current OPEC+ agreement of 9.7 million barrel cuts a month will not be easy for Russian producers and service providers. Furthermore, Russian producers have different market demand expectations, in which they expect an upward trend from June onwards. Dr. Vakhshouri further stated that the OPEC+ countries will meet every month to determine the trajectory of the market and come to a decision on cut extensions.
When asked about light-heavy price spread on the refiners, Dr. Vakhshouri stated they are expecting a different light-heavy spread because of the IMO 2020 before the spread of COVID-19. However, there is now a heavy chunk of heavy crude oil out of market, due to the cuts by OPEC+ countries as a result of the outbreak. As a result of the significant cuts, the prices for heavy oil have been increased. Furthermore, due to the decrease in the volume of oil exported from Saudi Arabia, Dr. Vakhshouri stated that the price increase will prevent further price collapses. In regard to gasoline and light distillates, their margins have also changed due to the COVID outbreak.
In the discussion, Dr. Vakhshouri was questioned about the upward trajectory of oil prices and its effect on U.S. shale production. She stated that U.S. shale production has dropped dramatically. Most of the producers are not going to change their strategy that they had begun when there was a downward trend of oil prices. She stated that it is important for such companies to prioritize maintaining their cash flow, instead of increasing production again, in order to focus on their long-term strategy. Furthermore, Dr. Vakhshouri explained that most of the cuts were due to the stay-in-place orders, which is a short-term cycle activity. Therefore, as the prices are picking up, with the increase in gasoline demand due to more usage of personal vehicles, there could be a growth in U.S. production. However, as the fourth quarter nears, another drop in production can be expected.