Washington’s efforts to broker a truce between Saudi Arabia and Russia appear to be making progress, with Riyadh calling for an urgent meeting of the OPEC-plus alliance “and other countries” to end the chaos in the global oil market.
The Saudi call for a Monday meeting came after President Donald Trump said on Thursday that he expected Riyadh and Moscow to reach an agreement soon on unprecedented production cuts of 10 million barrels a day or more, an enormous cut that would dwarf the previous 2.1 million OPEC-plus deal. That arrangement collapsed in early March when Russia declined to make new cuts, prompting the price war and the Saudis’ decision to flood the market.
There was no immediate confirmation from Saudi Arabia or Russia that they were close to clinching such a deal, but Reuters cited a an OPEC source yesterday saying the broader group of 24 oil-producing countries were considering cutting supply by 10 million barrels per day.
The growing momentum for some sort of agreement among major oil producers to reduce the world’s massive oversupply hinges on cooperation from countries beyond OPEC-plus – notably the United States, but potentially other G20 countries as well. Russia, fed up with yielding market share to U.S. shale and other non-OPEC producers for years, is demanding broader participation.
Meanwhile, chief executives from at least seven energy companies are set to meet with President Trump today at the White House to discuss energy policy. The meeting will include CEOs from Exxon, Chevron, Occidental Petroleum, Devon Energy, Phillips 66, Enterprise Transfer Partners and former Continental Resources CEO Harold Hamm.
While the oil industry’s main trade association, the American Petroleum Institute, is on the record as opposing anti-free market restrictions on U.S. producers, shale companies have brought on Rick Perry, former U.S. Energy Secretary, to lobby for sanctions against Saudi Arabia and Russia, including blocking Saudi deliveries of medium-grade crude to U.S. refiners.
The growing momentum for some sort of agreement among major oil producers to reduce the world’s massive oversupply hinges on cooperation from countries beyond OPEC-plus – notably the United States, but potentially other G20 countries as well. Russia, fed up with yielding market share to U.S. shale and other non-OPEC producers for years, is demanding broader participation. How realistic is this? Key questions are answered below.
What other countries could join an extended OPEC-plus coalition?
Saudi Arabia is looking toward oil producers among the G20 nations to bolster any OPEC-plus actions. Of the list of G20 countries, only a handful have any significant oil production, and even fewer have any sort of export capabilities. Chief among these is the United States, but other major producers include Brazil, Canada and Mexico. The latter is already part of the OPEC-plus coalition.
Won’t they have to cut anyway because of low prices?
It is increasingly apparent that both public and private oil producers will have to cut production as storage fills and prices for physical crude linger in the doldrums, in some cases in the single-digits for some grades. Saudi Arabia and other OPEC producers have signaled a ramp-up in production, but as demand for oil products plunges there will be a dearth of buyers to support those plans. Western companies continue to tout free market solutions to oversupply, but such an approach would inevitably lead to shut-in production volumes regardless. Before Thursday, experts pointed to 7-10 million barrels a day of global shut-ins by June. But this still pales in comparison to expected demand destruction of almost 20 million barrels a day from coronavirus during the second quarter. That means more cuts are needed to rebalance the market.
Can US President Donald Trump order a cut in US oil production?
Under U.S. regulations, the president does not have the power to tell private companies to stop producing oil. Much of the regulatory power over the oil industry in the U.S. resides with individual producing states.
What about Texas and other US states?
The Texas Railroad Commission (RRC) – which regulates the oil industry in the state – has the power to allocate production volumes and has exercised it extensively in the past, but not since the 1970s. RRC Commissioner Ryan Sitton has pitched just such a plan and pushed it to officials from Russia, Saudi Arabia and Canada, among others. But Sitton only holds his office until November after losing a primary election. Officials from other producing states have not publicly expressed the same support for a return to government-mandated production cuts in the US, but Sitton has continued to push the issue and even won support from one small producers group in Oklahoma. Fellow commissioners have also been reticent to endorse Sitton’s overtures, but late Wednesday, Chairman Wayne Christian came out in support of the president’s negotiations with Saudi and Russia. Sitton has said Texas could cut “as much as needed” and that he was reaching out to other state regulators to prod them to join. The Permian Basin alone produces about 5 million barrels a day, or 40 percent of total U.S. output.
Will US producers make a voluntary cut?
By law, U.S. producers are prohibited from coordinating among themselves in any way that could impact prices. Chevron is expected to resist any push by Trump to shut in production. And Exxon Mobil said it “was not seeking any US federal or state intervention measures in energy markets.” But voluntary cuts are already under way and more seem inevitable given prevailing oil prices and physical market constraints. Further, two Permian Basin independent heavyweights – Pioneer Natural Resources and Parsley Energy – have formally requested that the RRC return to market management. So, while a coordinated cut might be impossible, material production cuts in the United States would appear likely, whether or not there is an official deal to do so.
What other avenues could be used to curb US production?
Trump could seek to reimpose the ban on oil exports that was in place in the United States for decades after the Arab oil embargo but was lifted in 2015 after intense industry lobbying. U.S. crude exports averaged 3.15 million barrels a day in March. But such a move could end up hurting the U.S. oil industry more than it helps, flooding domestic markets and pushing down physical oil prices even if it might boost benchmark oil futures. And such an excessive cut to market access may be seen as overzealous.
What else could the US offer to facilitate an agreement?
Trump could offer Russia sanctions relief – and there are strong indications that this is on the table. The United States has become increasingly zealous in its enforcement of sanctions and most recently targeted Russian state-run giant Rosneft and subsidiaries Rosneft Trading and TNK Trading International, regarded as the key facilitators of Venezuela’s oil trade. The United States has also sanctioned companies helping Russia build the Nord Stream 2 gas line into Europe. Lifting that burden could be one Trump tactic to bring Russia to the table. Some insiders claim that lifting sanctions from Rosneft trading subsidiaries is part of the nascent oil deal with Trump. Elliott Abrams, U.S. special representative for Venezuela, was quoted as saying Thursday that “If Rosneft Trading has nothing to do with Venezuela, then the sanctions that are based on its conduct in Venezuela or with respect to Venezuela should be lifted.”
What about Canada and Brazil?
The province of Alberta – home to the vast majority of Canada’s oil production – began curtailing production last year in the face of low prices and already has seen an estimated 100,000 barrels a day in voluntary cuts, with more threatened. Alberta Premier Jason Kenney vowed Wednesday to “never surrender Canada’s energy industry to OPEC dictatorships and foreign special interests” in a tweet but backtracked 24 hours later, telling reporters that he had discussed a possible production curtailment agreement with U.S. officials. Brazil’s state-run Petrobras operates much of the country’s production, putting it in the driver’s seat on output decisions at those facilities. This week, Petrobras announced it would shut in 200,000 barrels a day of production from mature fields onshore and in shallow waters. It seems unlikely Petrobras would be willing to curtail the growing volumes coming from low-cost pre-salt wells that are relatively early in their production life.