Russia Skeptical of U.S. Contribution to Global Oil-Cut Deal
Russia Skeptical of U.S. Contribution to Global Oil-Cuts Deal
(Bloomberg) -- Russia cast doubt on the proposed U.S. contribution to a global deal to reduce oil production, potentially throwing a spanner into delicate negotiations the day before a virtual OPEC+ meeting.
The world’s largest oil producers will meet on Thursday and Friday in an effort to staunch the flood of crude that’s hammering prices and threatening the stability of companies and countries. Saudi Arabia, Russia and their OPEC allies are discussing deliberate production cuts to offset the impact of the coronavirus pandemic, but so far the U.S. is only offering an output decline driven by market forces.
With just over 24 hours left before the Organization of Petroleum Exporting Countries hold crucial talks, many issues remained unresolved, said people familiar with the negotiations. The role of the U.S. in any deal had become a clear sticking point for Moscow.
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.”
Russian Demands
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. This process could remove a sizable amount of oil from the market -- the U.S. Energy Information Administration cut its 2020 production forecast by more than 1 million barrels a day on Tuesday -- but it would happen only gradually, and might not even happen if prices were to rebound.
For the Kremlin, it’s vital that the U.S. demonstrate its commitment with some kind of public statement emphasizing that its contribution wouldn’t solely consist of the gradual production declines made inevitable by the price rout, according to Russian officials and industry executives familiar with the discussions.
“For this deal to be a success, all participants need to cut their production promptly,” said Andrey Polischuk, Moscow-based oil and gas analyst at Raiffeisenbank. America needs to commit to keeping its output at agreed levels “otherwise, once oil prices grow amid the success of the OPEC+ deal, U.S. shale output will recover, which is not in the interests of other participants.”
Cutting production now would mark a reversal for the Kremlin, which rejected Saudi Arabia’s proposal for deeper curbs last month. The historic nature of U.S. participation in some kind of deal with OPEC+ would make the move appear less like a Russian retreat, the people said. Moscow is also hoping for American concessions on other issues, possibly the easing of sanctions, two of the people said.
If these conditions could be satisfied, Russia would consider cutting its production by about 1 million barrels a day, the people said. One person suggested it could possibly be as much as 1.5 million. Reductions could last through to the end of the year, but Moscow would prefer to return to higher production levels sooner, they said.
High Stakes
With Trump pressing hard for a deal, and the whole Group of 20 involved too, a lot is riding on this week’s negotiations. OPEC+ will convene a video conference at 4 p.m. Vienna time on Thursday, by video link. Saudi Arabia will lead a virtual conference of G-20 energy ministers the following day at 3 p.m. Riyadh time.
There were already signs of support from other G-20 members.
India, the world’s third biggest oil consumer, was set buy millions of barrels of Middle Eastern crude for its strategic reserves, according to officials with knowledge of the matter. The purchases are aimed at taking advantage of low prices, but also a signal of solidarity with the campaign to stabilize markets after Oil Minister Dharmendra Pradhan spoke with his U.S. and Saudi Arabian counterparts and the head of the International Energy Agency.
In a televised address on Tuesday, Jason Kenney, premier of Alberta in Canada, said the combined toll of Covid-19 pandemic, the global economic recession and the collapse in oil prices represent the greatest challenge in the province’s modern history, threatening its main industry and wreaking havoc on its finances.
Fake Deal?
If Russia, OPEC and the G-20 can make a deal, it could result in a historic reduction of about 10% of global supply, dwarfing any previous market interventions. That’s something that the so-called physical market for crude -- trade in actual cargoes rather than futures contracts -- needs immediately.
Refiners are sharply reducing the volumes they buy as billions of people go into lockdown, and if the flow of oil isn’t restricted soon, global storage tanks could fill up and pipelines become clogged with unwanted crude. Kenney warned of a “very real possibility” that prices of Alberta’s energy products could turn negative, with grave consequences for the industry.
However, traders and consultants are worried any deal between OPEC+ and the G-20 would end in a fudge, removing far less crude from the market that the headline cut of 10 million barrels a day suggests. In a note to clients that echoed the view of many in the market, Amrita Sen, chief oil analyst at consultant Energy Aspects Ltd., asked whether it would end up being a “fake deal.”
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