Saudi Arabia and Russia appeared on the verge of impressive, but borderline inconsequential oil production cuts at an OPEC+ video conference on Thursday.
The participants, with the exception of Mexico, converged upon the 10 million barrel per day (bpd) reduction thrown out last week by Donald Trump.
Mexico’s oil minister said her nation would be willing to reduce output by 100,000 bpd for the coming two months. The negotiations will continue at the G20 energy ministers’ meeting on Friday.
The current proposed cuts, analysts say, are superficial, climbing down from current hyper-production levels and in response to a global plummeting of demand amid the Covid-19 pandemic.
It is a “face-saving agreement” in the words of James M. Dorsey, senior fellow at Singapore’s S. Rajaratnam School of International Studies and Middle East Institute.
“In effect, a temporary halt to a market share war that will erupt again once the coronavirus has been brought under control and there is a degree of economic recovery,” he told Asia Times.
A Gulf-based economist assessed that “it will appear as a significant cut. The market will rally. Only for it to crash again in a few days once the market fully digests that the issue is not supply induced.”
He added that “all oil producers were going to cut supply regardless of this deal, as oil storage is in scarce supply.”
But the deal is amounts to “the organic destruction of demand.”
ING Bank on Thursday cautioned observers to note the reference level for any cuts. While cuts from the 2020 first-quarter average would be significant, a reduction from the recent price war levels would not.
“It would likely make sense for them to use current output, given that it would make the size of the cuts appear larger,” said ING.
“Lots of traders and analysts warning the various parties can fudge their way to a big headline number,” tweeted David Sheppard, energy editor at the Financial Times.
The true cuts – already in the works due to the price collapse and lack of storage – could be much less significant.
Russia’s oil minister Alexander Novak was quoted Wednesday saying Moscow could be willing to cut 1.6 million barrels per day as part of a new three-month round of production cuts.
Moscow has also signaled it is looking for the United States, now the world’s top producer, to respond in kind when G20 energy ministers hold e-court on Friday.
OPEC plus Texas
From the Oval Office down to the enthusiastic Texas regulator Ryan Sitton, the American line has been that an “organic” US oil reduction is all that is needed or coming.
The Kremlin, however, says it will not accept a “natural reduction” in US oil output as a substitute for parallel cuts.
“The United States is not a part of OPEC+, but it seems that Russia, Saudi Arabia and partner countries are setting the US at the center of their meeting and preparing for it to take the blame if the meeting fails,” Ellen R Wald, author of Saudi Inc., said in a Thursday column for Forbes.
The Saudis have openly stated that the Thursday OPEC+ teleconference is “in response to the request of the US President and our friends in the USA.”
King Salman is likely seeking to contain the wrath of Senate Republicans, outraged over threats to US shale, and to maintain their support for his son’s claim to the throne.
Trump is equally looking to avert a shale industry collapse in an election year. Whether any cuts, however deep, can accomplish that amid plummeting global demand is another question.