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To deal or not to deal

Russia and Saudi Arabia blame each for the initial Opec+ breakdown. Will necessity trump naked ill-will this week?

It is fair to say that Russia and Saudi Arabia were hardly giving off unambiguous signals of a desire to kiss and make up over the weekend. The market must now decide whether the need for a supply-side response to unprecedented short-term demand destruction trumps the finger-pointing.

Moscow will take part in a meeting with its Opec+ partners via video conference on Thursday, the Kremlin has confirmed. 

Last Friday, Russian president Vladimir Putin pinned the blame for the oil price collapse squarely on Saudi Arabia. It was the kingdom, not Russia, that had withdrawn from the Opec+ deal on supply quotas in early March, according to Putin’s narrative.

A larger, 15mn bl/d reduction might be necessary, in the view of the Russian energy minister

Moscow had wanted to extend the pact after its 1 April expiry, says Putin. Subsequent moves by Saudi Arabia to cut its posted prices and ramp up production were aimed at knocking out higher-cost US shale oil supply.

“Our country has always .... advocated for the long-term stability of the oil market, taking into account the position of both producers and consumers,” says the Russian leader.

Riyadh takes entirely the opposite view of how things played out, with Saudi energy minister Prince Abdulaziz bin Salman immediately describing Putin’s version of events as “categorically false”.

The kingdom “exerted great efforts with Opec+ countries to take action to prevent a glut in the oil market”, says the prince. “However, this proposal made by the kingdom, and approved by 22 countries, unfortunately was not acceptable to the Russian side, resulting in no agreement.” As for Saudi Arabia seeking to undermine US shale oil, Riyadh instead contends that was Russia’s intent. 

Putting difference aside

Can the warring parties call a truce? Putin combined his combative language with a more conciliatory line. Producers need to “combine efforts”, he says, suggesting a global cut of 10mn bl/d was needed to tighten the market.

A larger, 15mn bl/d reduction might be necessary, in the view of the Russian energy minister Alexander Novak.

He fears a 15-20mn bl/d demand reduction within weeks, with the world at risk of running out of oil storage space in less than two months. Novak seems plugged into the reality of the situation in detailed numbers—fuel demand at pumps down by 30-70pc depending on the country and a 60pc reduction in air travel.

The Saudis also offered a carrot with their stick. The kingdom’s “arms remain open to those who want to find a solution for oil markets”, according to bin Salman.

Russia lifted 11.3mn bl/d of crude oil and condensate in March, according to energy ministry data, while Saudi Arabia claimed at the start of this month to have raised production to 12mn bl/d.

US response

US president Donald Trump took to Twitter last Thursday to say he was “expecting” Russia and Saudi Arabia to rein in their supply by 10mn bl or “as high as" 15mn bl, after discussions with Saudi Crown Prince Mohammed bin Salman. A new Russian-Saudi accord could hinge on US involvement.

The US has long condemned Opec for its cartel activity. A bill has circulated for years that would revise US trust law allowing Opec members to be sued for collusion. But now Washington appears open to working with the cartel, at least temporarily.

Ryan Sitton, the head of the Texas Railroad Commission, an energy regulator despite its name, recently discussed a global supply cut with Novak. “While we normally compete, we agreed that Covid-19 requires an unprecedented level of international cooperation,” he tweeted last Thursday.

Sitton later said he had discussed an international deal with the energy minister of the Canadian province of Alberta, Sonya Savage.

A coordinated supply response not only runs deeply against the US free market ethos, but also violates OECD competition law. The US Department of Energy declined to comment on its openness to joining a supply cut deal, or whether it might risk contravening OECD antitrust rules by doing so.

But department secretary Dan Brouillette has discussed the oil market situation with his Saudi counterpart, and the pair will continue talks on the issue at a G20 energy ministers’ meeting. This meeting is scheduled for Friday.

Norway, which produces around 1.75mn bl/d of oil, is more forthright about its potential involvement in a deal. The Norwegian petroleum ministry is “following the market development closely and has “a dialogue with key stakeholders, including other producing countries”, it says. “If a broad group of producers agree to cut production significantly, Norway will consider a unilateral cut if it supports our resource management and our economy.”

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