Global Oil Powers Stumble Their Way Toward Historic Deal

The world’s largest oil producers are pressing ahead with talks for an unprecedented deal to mitigate the devastating impact of the coronavirus crisis on their industry, even as their leaders exchange barbs. The challenge now is to nail down numbers everyone can live with.

Ministers and diplomats will spend the next two days talking about who’s willing to cut production, and by how much. The most important contributions will come from oil’s trio of big powers: Saudi Arabia, Russia and the U.S.

An effective deal will require all three to participate, but not every barrel cut will be the same. Russia and Saudi Arabia are set to curb their production significantly, said people familiar with the negotiations. The U.S. is more likely to offer up the kind of gradual output reductions that will come as American companies respond to a market where prices are low and storage tanks are full.

“They’re already cutting back and they’re cutting back very seriously,” U.S. President Donald Trump said of U.S. oil producers at a briefing in Washington on Monday. “I think it’s happening automatically.”

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After a turbulent few days in which Trump’s prediction of a historic output cut was followed by sniping between Moscow and Riyadh, there were signs that diplomats were making progress. U.S. Energy Secretary Dan Brouillette held a“productive discussion” over the phone with his Saudi counterpart Prince Abdulaziz bin Salman, the U.S. government said.

Trump Resists

The talks still face significant obstacles. A meeting of producers from OPEC+ and beyond -- which has been delayed once already -- is only tentatively scheduled for Thursday. Russia and Saudi Arabia want the U.S. to join in, but Trump has so far shown little willingness to do a deal with the cartel.

“Nobody’s asked me, so if they ask I’ll make a decision,” Trump said on whether the U.S. would join an output-cut deal. “I’ll let you know Thursday evening.”

The Organization of Petroleum Exporting Countries and its allies are slated to meet by video conference at 4 p.m. Vienna time on April 9, delegates to the group said.

That will be followed the next day by talks between energy ministers from the Group of 20, who will hold a video conference at 3 p.m. Riyadh time to discuss wider contributions to a production deal. Their call is scheduled to last about 2 1/2 hours, according to a diplomat involved in the meeting.

The G-20 may be a more acceptable forum to bring on board the U.S. and other big oil producers outside the OPEC+ alliance -- such as Canada and Brazil. Brouillette said he agreed with Prince Abdulaziz that there should be talks within that group “in the near future.”

Crude prices have tumbled by around 50% this year, as the economic effects of the coronavirus pandemic have knocked out about a third of global demand. The price crash is so dramatic that it’s threatening the stability of oil-dependent nations, the existence of U.S. shale producers, and poses an extra challenge tocentral banks. Industry officials say that if a deal to cut supply in an orderly way isn’t reached, the market will simply force producers to slash output asstorage space runs out.

The aim of talks, first revealed by Trump last week, is to cut oil production by about 10% -- the biggest ever coordinated reduction. Crude rallied on Trump’s comments but pared those gains as the diplomatic intricacies became clearer. Brent futures resumed their rally on Tuesday, advancing 1.4% to to $33.52 a barrel as of 9:35 a.m. in London.

However, even if a deal is struck for as much as 10 million barrels per day, that will barely dent the supply glut, which isestimated at as much as 35 million. In some corners of the physical market prices have already turned negative, and traders have been putting oil into tankers at arecord pace to store it at sea.

Jump Together

Saudi Arabia and Russia both say they want the U.S., which has become the world’s largest producer thanks to its shale revolution, to join the cuts. But Trump had only hostile words for OPEC on Saturday, threatening tariffs on foreign oil, though at a briefing late Sunday he said hedidn’t expect he’d have to use them.

It’s not clear if Russia and Saudi Arabia will require the U.S. to publicly commit to cut production -- a challenge in the private, fragmented American industry -- or if a compromise gesture would be enough. Alexander Dynkin, president of the Institute of World Economy and International Relations in Moscow, a state-run think tank, said Moscow would like the U.S. to lift some sanctions as a compromise.

Even a passive role for the American shale industry, whose output is already expected to go into decline at current prices, may be enough for a deal, according to Ed Morse, head of global commodities at Citigroup Inc.

“I think there is already an understanding between Saudi Arabia, Russia and the U.S.,” Morse said. “The U.S. is a party to the agreement, in effect, because the price of oil is already reducing drilling activity to an extent that production will likely be down 1 million barrels a day by the end of the third quarter.”

Russia and Saudi Arabia -- whichsparred publicly between themselves over the weekend -- have disagreed about how they would calculate the cuts, according to a person familiar with the talks.

Russia favors using an average of the first quarter output as the baseline, while Saudi Arabia wants to use its current April production. The difference is huge: the kingdom pumped 9.8 million barrels a day on average between January and March. In April -- as it wages its battle for market share -- it’s producing more than 12 million.

— With assistance by Grant Smith, Henry Meyer, John Follain, Dina Khrennikova, Ilya Arkhipov, Anthony Di Paola, Annmarie Hordern, and Stephen Cunningham

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