Donald trump claim that oil producers will make big cuts in production has helped push crude prices above $ 30 a barrel, from an 18-year low. Brent, the international benchmark, has increased by 35% in the last two days.
Saudi Arabia, meanwhile, has convened an emergency meeting of the broader Opec + group, which includes Russia, saying it may be ready to end the price war that helped cut the price in half. oil prices last month.
But analysts are wondering if a global deal can really be reached – and whether it will make a big difference in market prospects for the coronavirus.
What’s on the table?
Trump, the President, has said that there is an agreement between Saudi Arabia and Russia to reduce oil supplies from 10 million to 15 million barrels a day. It would be by far the biggest cut in Opec history.
Opec + is preparing to meet Monday – online – and with the coronavirus having helped reduce demand for oil by a third, or more than 30 million barrels per day, there is a strong incentive to conclude a sort of okay.
The petroleum industry has never faced a collapse in demand for the magnitude inflicted by this disease and is ill-equipped to deal with it. While production remains rampant, storage tanks could be filled within a few weeks, forcing a haphazard and damaging halt to production.
American shale oil producers have been particularly affected. Whiting Petroleum, a Denver-based group, declared bankruptcy this week. Yields on bonds issued by rival producers have soared, as investors expect more to collapse.
This led to a prospect that was once unthinkable – the United States somehow participating in a coordinated cut with rival producers.
What is the American position?
It’s far from simple. The country’s antitrust laws will limit the ability of companies to work together to reduce production, even if enough of them want to. Many in the industry, especially majors like ExxonMobil, are deeply opposed to coordination, both for ideological and economic reasons.
But it’s clear that – agreement or no agreement – US oil production is likely to decline. Prices are far below the level shale producers must reach, and the infrastructure for pipelines and storage tanks is quickly out of date. Businesses are also cutting spending, which will naturally lead to lower production.
There may therefore be a temptation to formalize this possible fall in production as the United States’ contribution to a global supply agreement. Even if prices went up quickly, American producers as a whole would remain under pressure, as they needed at least $ 45 a barrel to break even.
The Railroad Commission of Texas, which regulates the oil and gas industry in the largest energy-producing state, held talks with OPEC secretary general Mohammad Barkindo. RCT chief Ryan Sitton has described proportionate production cuts in the state – which were relatively common half a century ago – as “a bargain we can take to the table”.
Sitton told the Financial Times that Barkindo invited him to the Opec + meeting, although it is unclear if anyone will represent the United States in the talks.
Trump is scheduled to meet with U.S. oil companies on Friday afternoon.
Could an agreement raise prices?
Yes, but probably not much. An agreement should aim to avoid a further collapse in prices, rather than raising them significantly.
Per Magnus Nysveen of Rystad Energy said a reduction of around 10 million bpd would give the oil industry “the chance to prepare” for closings that would be forced anyway after storage runs out .
“This will give other producers enough time to adjust,” said Nysveen. “The market could balance out at prices above $ 30 a barrel, rather than collapse completely [to] about $ 10 or even less. “
Not all traders are convinced. The magnitude of the drop in demand means that an agreement could simply delay the inevitable. Much depends on the pandemic. If the locks seem to be stretching until the summer, the impact of any cuts could fade quickly.
“If you lose 30 million b / d of demand at any given time, you’re going to have to lose roughly the same amount of production,” said one trader.
Will Russia play ball?
It was Moscow’s decision to drop an offer to cut production further in early March that prompted Riyadh to start the price war.
But a month later, has Russia changed its mind? There are reasons to believe that he is strongly tempted. Each producer is faced with ultra low prices and the threat of having to reduce production at any time. Already, Russia is struggling to put all its crude on the market.
Russian President Vladimir Putin said Friday afternoon that he would welcome joint action to stabilize oil markets, saying any drop should be around 10 million barrels a day and that he would like the United States participate.
The comments represent a rapid change of direction for Moscow. Igor Sechin, head of state champion of Rosneft oil and close ally of Mr. Putin, long opposed cooperation with Opec and had hoped that a price war would harm the American shale industry which has gained market share from other producers in recent years. .
Putin said on Friday that he thought it was Saudi Arabia that wanted to put pressure on the US shale industry – a comment that can be considered provocative in Riyadh, given its close ties to Washington.
Saudi Arabia started this. Will he finish it?
Riyadh launched the first salvo in the price war a month ago when it lowered its oil prices and announced that it was increasing its supplies. He insisted that he would not cut again unless others did. But under American pressure – and with his international reputation in jeopardy – he could be ready for a truce.
The kingdom has one of the lowest production costs in the world, but it is far from immune to the collapse in oil prices. The demand crash means that it will be hard to sell its crude oil, even at low cost.
And while Saudi Arabia is battling its own coronavirus crisis, it may have been stung by critics that it has helped destabilize the global economy and limited the capacity of OPEC members such as Nigeria and Iraq to finance their own responses to the virus.
Above all, Saudi Arabia’s key western ally remains the United States – and especially Mr. Trump. With the November presidential election on the horizon, Riyadh may fear what a democratic victory would mean for relations with Iran, its main regional rival.
Trump has issued thinly veiled threats suggesting that he could retaliate against the kingdom if he does not accept an agreement. Shale societies have pressured him for an aggressive response, including a suspension of military aid to the kingdom.
Ultimately, the collapse in demand could force Riyadh’s hand.
“In one way or another, the supply of oil from Saudi Arabia was about to decline as there is no demand,” said Olivier Jakob at PetroMatrix, a consulting firm. . “Ultimately, for Saudi Arabia, it’s best to cut back on supply by describing that it is in control.”
Additional reporting by Derek Brower and Anjli Raval in London, Henry Foy in Moscow