By Syndication The Washington Post, Bloomberg · Javier Blas, Grant Smith
Saudi Arabia and Russia are closing in on an agreement to curb output, which could drain some of the oil surplus threatening to overwhelm storage tanks and force a wave of abrupt production shutdowns, according to delegates involved in the talks. The two energy giants, together with others in the OPEC+ alliance, will hold a virtual meeting on Thursday to finalize the accord.
A deal still hinges on some form of co-operation with the U.S. That may be difficult to achieve with President Donald Trump resisting any partnership with the OPEC cartel that he's vilified for years. But the group is holding out hope for some kind of American involvement, and buy-in by others such as Canada and Brazil, at a gathering of Group of 20 oil ministers scheduled for Friday.
"Nobody's asked me, so if they ask I'll make a decision," Trump said on whether the U.S. would participate in cutbacks. U.S. producers are "already cutting back and they're cutting back very seriously. I think it's happening automatically."
The Organization of Petroleum Exporting Countries and its allies are set to meet by video conference at 4 p.m. Vienna time on April 9. Russia and Saudi Arabia are likely to curb their production significantly, said people familiar with the negotiations, but that could depend on the participation of other major producers in a global deal.
The G-20 meeting the next day may be a more politically-palatable forum for the U.S., Canada and Brazil. The video conference is scheduled to start at 3 p.m. Riyadh time and last for about 2 1/2 hours, according to a diplomat involved.
A final global deal could pare supplies by 10 million barrels a day or more, a level Trump first invoked last week. However, even that amount may only dent the supply glut, which is estimated at as much as 35 million barrels a day.
"Even if a fudge can be found, some very creative maths is required to deliver the desired headline cut figure," said Amrita Sen, chief oil analyst at consultant Energy Aspects Ltd. "We struggle to see how we get to 10 million barrels a day of actual production cuts, even using inflated April baseline numbers."
Getting this far in the talks has required a whirl of international diplomacy to overcome the mutual recriminations over who's to blame for the industry's crisis.
After Trump first spoke about the prospect of a deal on Friday, Moscow and Riyadh traded barbs about who started a price war that is dumping even more unwanted crude onto world markets. A "productive discussion" between U.S. Energy Secretary Dan Brouillette with his Saudi counterpart Prince Abdulaziz bin Salman appeared to move the process forward.
Crude prices have tumbled by around 50% this year, as the economic effects of the coronavirus pandemic have knocked out about a third of global demand. The price crash is so dramatic that it's threatening the stability of oil-dependent nations, the existence of U.S. shale producers, and poses an extra challenge to central banks.
Industry officials say that if a deal to cut supply in an orderly way isn't reached, the market will simply force producers to slash output as storage space runs out.
Also see, Russia's Minimal Oil Storage Weakens Its Hand in OPEC Talks
Brent crude has rebounded by about 13% since Trump's comments on Friday, and traded near $34 a barrel in London on Tuesday. The physical market is still weak because of the large oversupply. Prices have already turned negative in some corners, and traders have been putting oil into tankers at a record pace to store it at sea.
Saudi Arabia and Russia are insistent on a contribution from the U.S., which has become the world's largest producer thanks to its shale revolution. Trump had only hostile words for OPEC on Saturday, threatening tariffs on foreign oil, though at a briefing late Sunday he said he didn't expect he'd have to use them.
It's not clear if Russia and Saudi Arabia will require the U.S. to publicly commit to cut production -- a challenge in the private, fragmented American industry -- or if a compromise gesture would be enough. Alexander Dynkin, president of the Institute of World Economy and International Relations in Moscow, a state-run think tank, said Moscow would like the U.S. to lift some sanctions as a compromise.
Instead, OPEC+ may need to make do with a more passive role for the American shale industry, whose output is already expected to go into decline at current prices, according to Ed Morse, head of global commodities at Citigroup Inc.
"I think there is already an understanding between Saudi Arabia, Russia and the U.S.," Morse said. "The U.S. is a party to the agreement, in effect, because the price of oil is already reducing drilling activity to an extent that production will likely be down 1 million barrels a day by the end of the third quarter."
That still leaves the question of how much of the burden will be shouldered by Russia and Saudi Arabia. The two had led the OPEC+ coalition's supply-management strategy for three years until falling out over how to deal with the coronavirus crisis in March. Even now, they're split on how to calculate the cuts, according to a person familiar with the talks.
Russia favors using an average of the first quarter output as the baseline, while Saudi Arabia wants to use its current April production. The difference is huge: the kingdom pumped 9.8 million barrels a day on average between January and March. In April -- as it wages its battle for market share -- it's producing more than 12 million.