U.S. President Donald Trump says he has brokered a deal with Saudi Arabia and Russia that would see sweeping oil output cuts.
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But the question remains: even if the world’s top three producers reach an unprecedented pact to curb oil output, can any deal remove enough oil when the coronavirus has destroyed a third of global demand for crude?
One thing, however, has become clear: as oil prices in the past three months made some of their biggest gyrations in history, taking action will prove a severe, if not impossible, test for OPEC+, the informal grouping that had propped up crude prices for three years until their agreement collapsed in March.
“This is an extraordinary situation that needs extraordinary measures,” the source said.
Oil demand has dropped by as much as 30 million barrels per day (bpd), roughly equivalent to the combined output of Saudi Arabia, Russia and the United States.
The fall is also more than the total production of all members of the Organization of the Petroleum Exporting Countries, the group that for decades was the most powerful player in the oil market.
“The magnitude of the current disruption is far beyond what OPEC can deal with alone,” the Saudi state King Abdullah Petroleum Studies and Research Center wrote this week.
It said “greater international cooperation was needed” and predicted U.S. and other higher cost producers could suffer.
Neither Saudi Arabia nor Russia has directly asked the United States – which has become the world’s biggest oil producer on the back of the shale revolution helped by OPEC+ support for prices – to join the any output cuts, a move prohibited by U.S. antitrust law.
But, in reality, some degree of U.S. participation would be essential for any deal that hoped to make a difference to market fundamentals.
“If the number of OPEC+ members increase and other countries join, there is a possibility of a joint agreement to balance oil markets,” one of Russia’s top oil negotiators, Kirill Dmitriev, who heads the nation’s wealth fund, told Reuters.
Still, how to respond revives the acrimonious debate in early March in Vienna, where Moscow and Riyadh fell out and the OPEC+ deal on supply curbs came to an abrupt end.
Saudi Arabia had pushed for deep additional cuts, saying it was no longer ready to shoulder the biggest burden of reductions and wanted others – with a finger pointed firmly at Russia – to take a more equitable share.
Moscow’s response was that deeper cuts made no sense until the full extent of the fallout from the coronavirus was known, given measures to combat the virus were bringing the world to a standstill, sending demand for jet fuel, gasoline and diesel into a nosedive.
Instead of finding a way to overcome their differences. Both sides misread the determination of the other to stick to their guns. Even as the finances of both nations took a pounding, they left the meeting promising to open the taps and grab market share with the inevitable result that oil prices crashed.
“Russia had miscalculated the Saudi response,” a veteran Russian oil insider said. “Moscow had never thought the Saudis would threaten to raise production so steeply. We thought they would just carry on with existing cuts.”
Saudi Arabia for its part also misjudged the magnitude of the oil demand collapse that sent oil prices to their lowest in almost two decades.
Riyadh quickly found that, in a market awash with crude, even usually reliable buyers don’t want more and steep discounts do little to change this. Oil majors and big importing nations alike have spurned the extra cargoes.
Now both sides may now have a chance to reconsider – and possibly a way to claim they were both right. If a deal is reached, Riyadh can say pumping more crude forced Russia back to the table. If others join in, Moscow can say the virus has had a bigger impact than anything OPEC+ alone could have dealt with.
Trump, who has said Moscow and Riyadh “went crazy” by pumping more after their supply deal fell apart, stunned the market on Thursday by saying he had brokered a deal with Saudi Arabia and Russia.
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