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With just one tweet, U.S. President Donald Trump conjured up the prospect of a global oil alliance to rescue the industry from the worst shock in history. The question is whether it evaporates just as quickly.
After the president’s social-media intervention on Thursday, oil traders are frantically assessing whether Saudi Arabia, Russia and possibly even the U.S. -- the world’s three biggest producers -- are poised to strike a once-unthinkable grand bargain to cut daily supplies in unison by 10 million to 15 million barrels.
Just spoke to my friend MBS (Crown Prince) of Saudi Arabia, who spoke with President Putin of Russia, & I expect & hope that they will be cutting back approximately 10 Million Barrels, and maybe substantially more which, if it happens, will be GREAT for the oil & gas industry!
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It’s unclear whether it’s feasible -- or even legal -- for such a coalition to come together. Or indeed whether it would be enough to tame the tsunami of unwanted crude now bearing down on world markets, which could be two to three times bigger than the cut touted by Trump.
“It’s too little, too late,” said Ed Morse, head of commodities research at Citigroup Inc. “Cuts are required immediately, and unless they happen, the price is going to go down significantly and force them to happen.”
There’s no doubt that the industry could benefit from some intervention. With global oil demand slashed roughly a third by the coronavirus pandemic, a gusher of surplus crude threatens to overwhelm the world’s storage tanks in a matter of months. The meltdown is exacerbated by the dispute between Moscow and Riyadh, prompting the Gulf kingdom to push unprecedented volumes of crude at customers in a tussle for market share.
Texas Two-Step
Trump’s claim that the two belligerents are ready to end their price war pushed the Brent crude price up by 21% on Thursday. The Saudis partially backed up their U.S. ally with a call for all producers to meet and stabilize the market. The global benchmark climbed further on Friday as OPEC+ prepared to hold an online meeting to discuss their plans next week.
Yet the kingdom stopped well short of promising production cuts and maintained its insistence that any deal would require cooperation not just from fellow members of the Organization of Petroleum Exporting Countries and their former ally in the Kremlin, but from all major producers including the U.S. itself. Russia was quick to deny any agreement had been reached.
Texas, home to the nation’s shale-oil revolution, has shown some willingness to join in, with the head of the state’s regulator and some companies saying they should participate in production curbs.
Trump’s tweet contained no such pledge. Still, a meeting between the president and several CEOs from oil majors scheduled for Friday is further fanning speculation that the White House is receptive to an even wider form of collaboration.
Difficult Deal
The deal between Riyadh and Moscow that created the OPEC+ group was a long time coming. It was only after two years of rock-bottom oil prices and several false starts that the alliance came together in late 2016. Even then, they were slow to boost crude prices and the group was dogged by accusations that some countries -- including Russia -- were reneging on their promises.
Lopsided Effort
OPEC+ giants haven't shouldered the burden of oil output cuts equally
Bloomberg calculations from OPEC, International Energy Agency data
Rebuilding the same alliance and adding even more producers into the pact would be a major challenge.
“The more people are at the table, the more difficult it is to get a deal,” said Pierre Andurand, whose Andurand Commodities Discretionary Enhanced Fund soared more than 140% last month through bearish bets on crude. “I find it difficult to believe that a deal like that could be agreed quickly.”
Even if political and industry leaders in the U.S. backed collaboration with OPEC in principle, operators in the U.S. shale patch would somehow need to parcel out their share of any collective cutback. American anti-trust laws, unless they were changed, would make any such effort fraught with legal risks.
Nor is it certain that the Saudis and Russia are ready to heal their split. The two fell out last month when Riyadh failed to convince Moscow to cut production in response to the demand slump caused by the virus. Angered by the splintering of the coalition they’d led for three years, the kingdom responded with an aggressive supply surge to a record 12 million barrels a day and deep price cuts aimed at Russia’s traditional markets.
The Saudis still appear to be adamant that all producers must play their part in eliminating the supply surplus. Russia, meanwhile, is holding to the view -- in public at least -- that production curbs are futile compared with the scale of demand destruction inflicted by widespread lockdowns to slow the virus.
“It’s very clear that Saudi Arabia is maintaining its position,” Amrita Sen, chief oil analyst at consultants Energy Aspects Ltd. said in a Bloomberg TV interview. “It will cut only if everyone else cuts.”
(An earlier version corrected the name of a fund in the 12th paragraph.)
Source: Bloomberg News
