There is rising prospects that the world’s largest oil producers will meet this week for unprecedented talks on a deal to mitigate the devastating impact of the coronavirus on the energy industry.
Hopes that the meeting which has once been delayed will hold after the Saudi Arabia, a major player in the oil market crisis gave a tacit support Tuesday.
Friday’s meeting will aim to “foster global dialogue and cooperation to ensure stable energy markets and enable a stronger global economy,” Saudi Arabia said in a statement on Tuesday.
Saudi Arabia and Russia were hammering out the terms of a deal to cut crude output at Thursday’s virtual OPEC+ meeting, hoping that members of the Group of 20 including the U.S. could agree to take similar measures on Friday.
Their actions will determine whether the world continues to drown in a flood of oil that’s starting to overwhelm storage tanks and force a wave of abrupt production shutdowns.
A deal still hinges on some form of co-operation with America, according to delegates involved in the talks. That may be difficult for OPEC to achieve, as President Donald Trump resists any partnership with the cartel that he’s vilified for years.
However, the collapse in crude prices to 18-year lows has triggered deep reductions in U.S. drilling that mean a drop in production is inevitable, which could be enough to satisfy Saudi Arabia and Russia.
“Nobody’s asked me, so if they ask I’ll make a decision,” Trump said on whether the U.S. would participate in cutbacks. American producers are “already cutting back and they’re cutting back very seriously. I think it’s happening automatically.”
The U.S. Energy Information Administration cut its oil output forecast by almost 10% on Tuesday, saying it now expects the nation to pump an average of 11.8 million barrels a day this year.
The fate of everything from wildcat explorers in Texas to government spending programs in West Africa will be decided in back-to-back online conferences.
The Organization of Petroleum Exporting Countries and its allies are set to meet by video link at 4 p.m. Vienna time on April 9. Russia and Saudi Arabia are likely to curb their production significantly, although key details have yet to be agreed as of Tuesday, said people familiar with the negotiations.
Whatever emerges from those talks could depend on what happens next. At the virtual meeting of G-20 energy ministers the following day, the U.S., Canada and Brazil will signal whether they will contribute to curtailing the global oil surplus. 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 reduce 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 caused by the lockdown of billions of people around the world to slow the spread of the virus, which is estimatedto have reduced demand by 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.”
In talks so far, Russia has favored using an average of the first quarter output as the baseline from which to cut production, while Saudi Arabia wants to use its current April production, according to people familiar with the discussions.
The difference is huge: the kingdom pumped 9.8 million barrels a day on average between January and March. In April — as it unleashed a shock and awe price war against its former ally — it’s been pumping more than 12 million barrels a day.
Given the severity of the breakdown in Saudi-Russia relations after the failure of OPEC+ talks in March, getting all sides back to the table constitutes an achievement in itself. It 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.
Brent crude futures have rebounded by about 10% since Trump’s comments on Friday, and traded near $33 a barrel in London on Tuesday. The market for actual barrels of crude is still weak because of the large oversupply. Prices have already turned negative in some corners of the world, 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 expecthe’d have to use them.
