Oil Producers Race for Output Deal With G-20 at Center Stage
The Asia Vision LNG carrier ship sits docked at the Cheniere Energy Inc. terminal in this aerial photograph taken over Sabine Pass, Texas, U.S.(Photographer: Lindsey Janies/Bloomberg)

Oil Producers Race for Output Deal With G-20 at Center Stage

(Bloomberg) -- Saudi Arabia, Russia and other OPEC+ nations are racing to negotiate a deal to stem the historic oil price crash, with the G-20 taking center stage to bring into the fold the U.S. and other energy producers.

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, a further sign that the diplomatic talks continue apace.

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 U.S. President Donald Trump has so far shown little willingness to do so as part of a deal between the Organization of Petroleum Exporting Countries and its allies.

As an alternative, oil diplomats are planning an emergency meeting of G-20 energy ministers for Friday, part of an effort to bring the U.S. and other big oil producers outside the OPEC+ alliance -- such as Canada and Brazil -- on board, according to two people familiar with the situation.

Brouillette said on Monday that Washington was “going to encourage the Saudis as chair of the G-20 to perhaps convene an energy ministerial toward the end of the week” as a forum to discuss the oil market. “I expect that that’s going to happen later this week,” he said.

Oil Producers Race for Output Deal With G-20 at Center Stage

Crude prices have fallen 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 to central 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 as storage 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 fell 2% on Monday, trading near $33 a barrel.

Russia and Saudi Arabia are “very, very close” to reaching a deal on oil-production cuts, Kirill Dmitriev, chief executive officer of the Russian Direct Investment Fund, said in an interview with CNBC.

However, even if a deal is struck for as much as 10 million barrels per day, that will barely dent the supply glut, which is estimated at as much as 35 million barrels a day. In some corners of the physical market prices have already turned negative, and traders have been putting oil into tankers at a record 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 he didn’t expect he’d have to use them. The G-20 may be an easier forum for the U.S. to embrace than OPEC.

“If the Americans don’t take part, the problem which existed before for the Russians and Saudis will remain -- that they cut output while the U.S ramps it up, and that makes the whole thing impossible,” said Fyodor Lukyanov, head of the Council on Foreign and Defense Policy, a research group that advises the Kremlin.

Oil Producers Race for Output Deal With G-20 at Center Stage

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, said Jason Bordoff, director of the Center on Global Energy Policy at Columbia University and a former oil official at the White House.

“Russia and Saudi Arabia’s condition that they will only cut production if the U.S. does too is going to be satisfied, because market forces will drive U.S. output down around 1 million barrels a day this year,” said Bordoff.

Back Channels

Russia and Saudi Arabia -- which sparred 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.

Any agreement will require diplomatic agility at a time when nations are devoting massive resources to fighting the pandemic itself. All three players -- Crown Prince Mohammed bin Salman, Russian President Vladimir Putin and Trump -- appeared to be maneuvering to avoid blame if talks fail. Yet the U.S. president has also said he’s confident there’ll be an agreement between Moscow and Riyadh to cut production.

“The chances of a meaningful deal that delivers real production cuts are low but back-channel talks are ongoing,” said Amrita Sen, chief oil analyst at consultant Energy Aspects Ltd. “Mohammed bin Salman is under heavy political pressure from Trump to demonstrate the Kingdom isn’t trying to bankrupt the U.S. shale industry.”

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