(Bloomberg) – An unprecedented agreement between the world’s largest oil producers to cut production and save crude oil markets from a catastrophic, pandemic-induced collapse came closer after Russia signaled that it was ready to make cuts.
Moscow, whose resentment against US shale is arguably the biggest obstacle to an agreement to save the world’s oil industry from collapse, said on Wednesday that it was ready to increase production by an unprecedented 1.6 million barrels a day, or around 15% to reduce. Oil prices rose in New York.
The fate of entire oil-dependent economies, thousands of companies and millions of jobs in the oil industry is at stake, as the OPEC + coalition and the group of 20 oil ministers gather in two major video conferences this week. Crude oil futures have dropped to their lowest level in two decades as global lockdowns cut oil demand in some areas by up to 70% and Russia and Saudi Arabia are fighting for their share of a shrinking market.
However, the fight has not yet been won because the Kremlin insists that the US should do more than just let market forces reduce its record production. President Donald Trump, meanwhile, has put tremendous diplomatic pressure on Russia and Saudi Arabia, saying that the US cut will be “automatic” as prices near America’s 18-year lows have plunged America’s slate area into an emergency.
“I think they’ll sort it out – a lot of progress has been made in the past week,” Trump said at a White House briefing on Wednesday. “We now have an enormously strong energy industry in this country, number one in the world, and I don’t want these jobs to be lost.”
Saudi Arabia is one of the few countries in the world that can boast oil production that is profitable in the current environment. But the kingdom’s economy is also at risk as Riyadh needs much higher crude oil prices to fund its budget. Russia too.
The two largest oil exporters broke a historic pact to curb production in March and released a flood of crude oil that is overwhelming warehouses worldwide as the Covid 19 crisis wipes out demand. Russia argued at the time that it was unwilling to sacrifice its companies’ production to support prices, while slate researchers in the US benefited from the cuts without contributing.
Moscow has not diminished from this view, but its apparent move toward an agreement after days of intense negotiations has coincided with a series of data that show the decline in oil demand due to coronavirus locks. Russia does not have enough storage capacity to continue pumping crude if no one buys it.
While China is expected to boost oil processing in April, giving the market a glimmer of hope, the move is unlikely to undo the historic declines in the U.S., India, and elsewhere.
Demand in the United States has now dropped to 14.4 million barrels a day. This is the lowest data level since 1990 and a decline of more than 30% compared to the pre-crisis level, as government figures showed on Wednesday. In India, the third largest oil consumer in the world, official data showed that demand fell by almost 18% in March, although the country was only closed on March 25. And the refineries privately stated that demand had dropped by up to 70% in early April.
The astonishing losses, coupled with anecdotal declines of up to 70% in Europe, mean that the world may be using less oil than previously thought, traders said. In normal times, the world uses about 100 million barrels a day, but some traders believe they only consume 65 million or even less.
“The drop in demand, which is far greater than the most optimistic cuts by OPEC ++, will ultimately lower prices,” said Björnar Tonhaugen, head of the oil market at Rystad Energy.
The diplomatic dispute between the world’s best oil producers had intensified on Wednesday before Russia’s declaration of a possible cut in production.
The Kremlin said that Russia does not see a reduction in supply due to falling demand or lower prices as a real cut in production. It was Moscow’s first statement on this crucial aspect of the talks, and showed that President Vladimir Putin may expect the US to make a more significant contribution than his counterpart Trump is willing to make.
“They compare the general decline in demand with cuts to stabilize the world market,” Kremlin spokesman Dmitry Peskov told reporters at his daily conference call when asked if Russia would accept US cuts in production that were only driven by market forces. “These are completely different things.”
Washington has previously announced the reduction in U.S. production expected due to Exxon Mobil Corp. to independent shale researchers cut spending in response to low prices. This process could remove a significant amount of oil from the market, but would only take place gradually and only if prices remained low.
See also: Price-driven cuts in the US lose for OPEC +: oil strategy
Aside from the role of the United States, Russia and Saudi Arabia have not yet agreed on how to distribute production restrictions across OPEC + countries, discussion experts said, asking not to be mentioned to discuss diplomatic negotiations. Neither did they agree on the basis for the cuts.
“It is solvable – the overwhelming likelihood is that it will be resolved by tomorrow,” said Ed Morse, director of raw materials research at Citigroup Inc., on Wednesday. “It’s a negotiation: someone has to change their position or there has to be a middle meeting. I don’t see any advantage for someone who doesn’t have an agreement.”
West Texas Intermediate, the US crude oil benchmark, rose up to 12% after Russia signaled its willingness to cut production. The note closed 6.2% higher at $ 25.09 a barrel. It has still dropped almost 60% for the year.
With Trump pushing hard for a deal and the entire 20-man group involved, a lot depends on this week’s negotiations. The OPEC + will convene a conference at 4 p.m. Vienna time on Thursday, via video link. Saudi Arabia will host a virtual conference of the G20 energy ministers at 3:00 p.m. the following day. Riyadh time.
As demand for gasoline, diesel, and jet fuel decreases, refineries around the world reduce the amount of crude oil they process, thereby reducing their purchases. On Wednesday, more refineries cut prices by around 30%, including HollyFrontier Corp. and Marathon Petroleum Corp. Due to the lower demand for crude oil, barrels are diverted into tanks and oil tankers are converted into floating storage facilities.
The most shocking decline in US consumption has been focused on gasoline, the fuel that has fueled the American way of life for a long time. The Energy Information Administration announced that a proxy for gasoline demand has dropped to 5.06 million barrels a day. This is the lowest value since weekly data became available in 1990. Separate monthly data suggest that the United States may not have used as little gasoline since June, the year of the year, on moon landings.
If Russia, OPEC and the G-20 could reach an agreement, this could result in a historic reduction in global supply of around 10% or around 10 million barrels a day, and may overshadow previous market interventions. This is something that the physical market for crude oil – trading actual loads instead of futures contracts – needs immediately.
However, traders and advisors fear that a deal between OPEC + and the G-20 would end in a fudge that removes far less crude oil from the market than the headline of 10 million barrels a day suggests. In a message to customers that reflected the view of many market participants, Amrita Sen, chief oil analyst at Energy Aspects Ltd., asked whether the talks would lead to a “fake deal”.
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