The prospects of stemming an oil price collapse exacerbated by a coronavirus-led drop in global crude demand and the Riyadh-Moscow price war brightened with energy ministers from OPEC and independent producers agreeing, during a teleconference summit April 9 and a virtual G20 summit April 10 on a tentative deal to reduce global crude supplies by a whopping 15 million barrels a day (bpd).
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The groundbreaking agreement reached by the 23-member alliance of OPEC members and independent producers producers stipulates OPEC+ initially cutting its collective output by 10 million bpd – equal to 10% of global supplies with — an expectation of up to 5 million bpd of production cuts from outside OPEC+.
In putting aside their differences and ending their month-long price war, Saudi Arabia and Russia committed to each slashing its current production levels by 42.5 million bpd, with Russia accepting a 2 million bpd cut. OPEC+ member Mexico had balked at being assigned a 400,000 bpd reduction, which threatened to scupper the entire agreement, but Trump announced that the US would absorb 250,000 b/d of Mexico’s allotment with Mexico reimbursing Washington at a later date.
How effective the groundbreaking agreement will be depends on the commitment of the world’s biggest oil producers in the coming weeks and months but the price war has already strained Saudi Arabia’s political and economic relationships with Moscow and added potential wrinkles in its ties with the United States.
Proud of its unparalleled role as the swing producer that alone could moderate market instability through sizeable crude output cuts or boosts, Riyadh had demanded that the current burden be shared by other large producers, including Russia, the United States, Canada and Norway.
Moscow had insisted that its participation in a major reduction agreement was contingent on the United States joining in.
The price war erupted after Russia rejected Saudi-led efforts in early March to increase OPEC+ production cuts by 1.5 million bpd to combat an oil-price plunge resulting from the coronavirus-led drop in global energy demand.
Moscow wanted to take a “wait and see” approach in response to the rapidly growing impact of the virus on global demand.
Following Moscow’s reaction, Riyadh immediately slashed its official selling prices to its key markets and said it would quickly ramp up its oil production by more than 2 million bpd.
Moscow retaliated by saying it would boost its output by as much as 500,000 bpd.
The deterioration in relations between Moscow and Riyadh came after a three-year period of surprisingly strong cooperation between the two countries in co-managing OPEC+ agreements. The Saudi-Russian alignment on global oil production appeared to be a natural outgrowth of the political and economic ties that Riyadh and Moscow had begun developing after King Salman ascended to the Saudi throne in January 2015.
The Saudi government made it clear in June of that year that it was shedding decades-long Saudi antipathy towards Russia when then Deputy Crown Prince Mohammed bin Salman bin Abdulaziz Al Saud made a surprise visit to St Petersburg. That visit was followed by the two nations’ sovereign wealth funds developing a partnership for investments in Russia, with the Saudi fund agreeing to contribute $10 billion. Riyadh has reportedly only anted up $2.5 billion of its commitment, irritating Moscow.
Some 15 agreements between the two countries were signed during King Salman’s historic visit to Moscow in October 2017, including the kingdom expressing interest in purchasing Russian S400 missile defence systems valued at $2 billion. That agreement remains in limbo.
Similarly, some 20 Russian-Saudi deals were inked during Putin’s visit to the kingdom last October, but a number of those agreements may well have been for public show. State oil firm Saudi Aramco had already stepped away from negotiations with Russian gas producer Novatek’s Arctic liquefied natural gas project earlier in 2019.
Washington has held a long-standing position that OPEC is a cartel and that market forces should determine oil prices instead of manipulation by a group of producers on coordinating output levels. Yet, US President Donald Trump demanded that Saudi Arabia and Russia end their price war and that OPEC+ agree to 10 to 15 million bpd of output reductions. The US leader even threatened to slap “very substantial tariffs” on Saudi and Russian oil imports if the price war continued and no reduction agreement was reached.
The US government and American oil firms are prevented from formally joining any OPEC+ agreements due to antitrust and sovereignty reasons, although US output cuts could be legally made if state regulators or the federal government set lower production levels.
US Energy Secretary Dan Brouillette, in remarks during the G20 virtual meeting, indicated that US oil production will likely fall as much as 2 million bpd by the end of this year due to low oil prices.
Brouillette also said that the Trump administration will open up the country’s Strategic Petroleum Reserve to “store as much oil as possible” in an effort to take surplus US crude off the market. According to some estimates, that could remove as much as 850,000 bpd of US crude from the market in the next few months and could be seen as part of the US’ contributions to output cuts.
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