​OPEC+ pushes for global cut to stem rout as Russia ready to move

Convent refinery in Louisiana. Image: Shell

The OPEC+ coalition is pushing for other oil producers to join a deep reduction in global crude output and stem a historic price crash, as Russia’s energy industry signalled it was ready to move.

Oil surged on the prospect that an idea first touted by U.S. President Donald Trump on Thursday looked to be gaining some traction.

As the coronavirus decimates demand for crude, the impact of low prices is reverberating around the world -- threatening the budgets and political stability of oil-dependent nations, the existence of the U.S. shale industry, and jobs in an industry already in turmoil.

There are still massive obstacles to a deal: There’s no indication that Trump will bow to Saudi demands that the U.S. join the cartel in what would be an unprecedented global maneuver. But Russia’s oil industry is now ready to cut, according to people familiar with the situation, and a meeting of OPEC+ members that Saudi Arabia wanted has been hastily scheduled for Monday.

A global cut of 10 million barrels a day is a realistic goal, according to a delegate who spoke on condition of anonymity. That figure was first mentioned by Trump on Thursday as he called for a coordinated production cut.

LateronFriday, the U.S. president will meet with oil executives, who arebattling among themselvesas to what the administration shoulddo.Trump’s Russian counterpart, Vladimir Putin, is also meeting his country’s oil-industry bosses.

Adding U.S.

A deal with non-OPEC+ nations including the U.S. would set a historic precedent. The Organization of Petroleum Exporting Countries has been managing supply since 1960, but its power has waned since the shale revolution turned the U.S. from importer to major producer.

So far, in the ground war, there is no sign of any movement toward a truce. Saudi Arabia is ramping up exports, as it promised to do.

But diplomatically it’s a different picture. For several days, Saudi Arabia had been wrong-footed by Russia, as Moscow sounded open to talks and blamed the price collapse on the kingdom. Subsequently, by saying it’s ready to cut, the kingdom put the onus on Moscow, forcing the latter to reverse its opposition to cuts to avert any blame for the damage. There’s still no official word from the Kremlin on its position.

It’s a battle of willsand egosbetween Putin and Saudi Crown Prince Mohammed bin Salman. And watching, trying to force them into a deal without committing too much himself, is Trump.

Big enough?

Even if an accord can be struck, a cut of 10 million barrels a day would barely dent the glut of oil that has been created by the economic fallout from the pandemic. Traders estimate the lost demand could be as high as 35 million barrels a day.

Brent crude, which jumped more than 40per centon Thursday after Trump’s announcement before paring gains, rose 15per centon Friday. It’s still down almost 50per centthis year as the virus fight grounds planes and shutters huge swaths of the global economy.

In some corners of the market, physical prices have gone negative and some producers are expected to start suspending output as there’snot enough spaceto store the excess crude. Tankers havefilled up fastas ships are being used as storage rather than transport.

For many in the petroleum industry, Saudi Arabia and Russia have no choice but to cut.

“In our view there is no OPEC+ choice involved, the rhetoric is window-dressing, the market will deliver cuts,” said Paul Sankey, a veteran oil analyst at Mizuho Bank Ltd.

Oil-producing nations around the world arefeeling the painof the price war, which started a month ago after Russia refused to take part in deeper cuts. Saudi Arabia aggressively discounted its crude days later, in a move to seize customers from Russia’s traditional markets.

Shale producers in the U.S. are struggling and national finances in multiple countries are under pressure. Russia, for example, is now expecting oil prices at $20 a barrel this year and will ramp up borrowing to make up for a budget shortfall.

Saudi Arabia will also have to make deep budget cuts as oil accounts forthe vast majority ofits revenue. The kingdom’s next move in the price war could come as soon as Sunday, when it sets official prices for its crude exports. The operation could be postponed, however – as it was last month – to avoid prejudicing the Monday meeting.

Washington’s options

The White House has considered tariffs on foreign oil imports to protect U.S. producers, though the idea is opposed by some senior Trump advisers led by Larry Kudlow, the director of the National Economic Council, according to people familiar with the matter.

The idea of a U.S. production cut, probably executed by capping exports, is also on the table at the White House, though many oil industry representatives have warned that the approach would cause the U.S. to cede the very “energy dominance” Trump has repeatedly celebrated.

© 2020 Bloomberg L.P.

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