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Russia and Saudis Will Cut Oil if the US Will, But the US Can't, So No One Will, and US Shale Will be Crushed


Today there is a meeting by video of the OPEC states and Russia. Tomorrow the energy ministers of all G-20 states will likewise meet. Their discussions will be about the sinking global oil price caused by a lack of demand due to the novel coronavirus pandemic and record oil output from Saudi Arabia and Russia. 'Western' media have been optimistic that an agreement will be found:

The Organization of the Petroleum Exporting Countries and other producers including Russia, a group known as OPEC+, are expected to discuss record cuts equivalent to 10% to 15% of global supplies, although demand has plunged by up to 30%.

It is unlikely that OPEC will agree on any cut unless the U.S. and other large producers join the deal. The U.S. is, for now, unlikely to do that.

Until the end of the last OPEC+ agreement this month and the onset of the pandemic demand slump, the three top producers were the U.S. with 12.7 million barrels per day, Russia with 10.9 mbpd and Saudi Arabia with 9.8 mbpd.

Since 2016 OPEC and Russia had reduced their production to keep the oil price in the $60/b range. This effectively subsidized the U.S. shale industry. U.S. production kept growing while production by Russia and Saudi Arabia was artificially limited. It allowed the U.S. to grab more global market share at profitable prices.

U.S. crude oil production
Source: Macrotrends - bigger When the pandemic arrived Saudi Arabia urged Russia to agree to further production cuts. But that would have kept the price of oil high enough for the U.S. shale industry to grow at additional the costs for Saudi and Russian production. Russia was not willing to allow that.

Now, as the prices have dropped to $20 per barrel U.S. shale oil is no longer profitable and the shale companies are on the verge of going bankrupt. That is clearly one outcome that Russia would like:

As soon as U.S. shale leaves the market, prices will rebound and could reach $60 a barrel, Rosneft’s Igor Sechin said recently. As fate would have it, in what many would have until recently considered an impossible scenario, a lot of U.S. shale might do just that.

Breakeven prices for U.S. shale basins range between $39 and $48 a barrel, according to data compiled by Reuters. Meanwhile, West Texas Intermediate (WTI) is trading below $25 a barrel and has been for over a week now.

But Russia also offered an alternative:

A new OPEC+ deal to balance oil markets might be possible if other countries join in, Kirill Dmitriev, head of Russia’s sovereign wealth fund said, adding that countries should also cooperate to cushion the economic fallout from coronavirus.
...
“Joint actions by countries are needed to restore the (global) economy... They (joint actions) are also possible in OPEC+ deal’s framework,” Dmitriev, head of the Russian Direct Investment Fund (RDIF), told Reuters in a phone interview.

That was an invitation to the U.S. to join a OPEC++ deal and to commit itself to production limits.

We discussed why the U.S. was unlikely to do that. Joining a cartel does not fit its neoliberal mindset:

“We’ve been benefiting from the lack of a free market for so long, the administration is torn about how to keep us a major producer while ostensibly keeping a free market, and I don’t think there’s a way to square that circle,” said [Randolph Bell, director of the Global Energy Center at the Atlantic Council].

Trump made a small counteroffer when he said that the U.S. oil output has already been reduced by 1.2 million barrels and that this was a sufficient U.S. contribution to limiting outputs:

“Nobody’s asked me, so if they ask I’ll make a decision,” Trump said on whether the U.S. would participate in cutbacks. U.S. producers are “already cutting back and they’re cutting back very seriously. I think it’s happening automatically.”

But for Russia that is hardly enough:

Russia does not consider a supply reduction driven by falling demand or lower prices to be a real output cut within the parameters of the proposed OPEC+ deal, the Kremlin said on Wednesday. It was the first statement from Moscow about this crucial aspect of the talks and indicated that President Vladimir Putin may be expecting a more significant contribution from the U.S. than his counterpart Donald Trump is willing to give.

“You are comparing the overall demand drop with cuts aimed at stabilizing the global market,” Kremlin spokesman Dmitry Peskov told reporters at his daily conference call, when asked if Russia would accept U.S. production cuts driven only by market forces. “These are completely different things.”

Washington has so far offered what officials described as “automatic” and “market-driven” cuts, which are expected to happen as companies from Exxon Mobil Corp. to independent shale explorers slash spending in response to low prices.

If the U.S. insist that "automatic" and "market drive" cuts are all it will contribute than its shale oil industry will have to die.

A new OPEC++ deal will require hard production cuts and limits that the government of the U.S. will have to guarantee for several years. A few additional good will gestures towards Russia will likely also be required.

But the Trump administration is adverse to binding international agreements. Its officials instead play their usual game of issuing empty threats:

Republican U.S. senators who have introduced a bill that would remove U.S. defense systems and troops in Saudi Arabia unless it cuts oil output will hold a call with the kingdom’s officials on Saturday, a source familiar with the planning said on Tuesday.

Writing nasty letters which demand that Saudi Arabia carries the burden of the unprecedented demand slump are useless in this situation. The normal global demand is 100 mbpd. It has now fallen to nearly 70 mbpd and is unlikely to revive during the next 18 month. Even if Saudi Arabia would end all of its production the markets would still be oversupplied. It would also destabilize the country which depends on the sale of its oil for 70% of its budget.

If the U.S. insists that the Saudis cut their production to save its shale oil producers the Saudis might break the old deal that makes the U.S. dollar the leading currency of the globe. If they decouple their currency from the U.S. dollar and demand payments in Euros, Yen or Yuan the U.S. dollar is toast.

The threats will not help at all. They only make Saudi Arabia more determined to go its own way.

Some people in the U.S. oil industry have caught up with the new reality:

Some old-guard Texas oil drillers are urging state regulators to clamp down on crude production to halt a price collapse more severe than any of them have ever lived through.

The largest U.S. oil-producing state hasn’t restricted crude production in almost 50 years but a growing chorus of explorers and related industries are advocating just such a move. The Texas Railroad Commission that has overseen the state’s industry for more than a century is scheduled to discuss so-called pro-rationing on April 14.
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Kirk Edwards, an industry veteran and chief executive officer of Latigo Petroleum LLC, estimates that within a month the oversupply will be so massive that Permian Basin drillers will no longer be able to send crude to refineries in the Houston area and Louisiana.

“Until two weeks ago, I was 100% against the use of proration in Texas to remedy these kinds of problems,” Edwards said in a letter to the agency. The commission and the Trump administration need to “step up to the plate and save Texas and the American energy industry right now, before it is too late.”

But the big industry players do not want a cut for everyone:

The appeals for supply caps highlights a growing schism between small, independent explorers and international behemoths like Exxon Mobil Corp. that oppose government intervention. In neighboring Oklahoma, oil-industry trade groups are at loggerheads over whether state regulators should step in.

The calculation for big and rich companies is different. They hope that the small producers will go bankrupt so that they can buy their already developed oil fields at record low prices. The would keep those shut down but would reopen them when prices are back to higher level.

Exxon is likely to have more political cloud than the small producers who now fear for their companies.

Today's OPEC+ talks are ongoing and they seem to prepare an offer that will then be proposed at tomorrow's G-20 meeting. The U.S., Canada, Brazil, Norway and others would then have to commit to make proportionally similar cuts.

But how big is the chance for that to happen?


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