A huge jet of flame bursting from an oil platform lights up the sky in a file photo. Photo: AFP

DA NANG – US President Donald Trump tweeted on April 2 that he expects Russia and Saudi Arabia to cut somewhere between 10 and 15 million barrels per day (bpd) of oil production, a hugely impressive figure representing around 10% of global oil production.

“Just spoke to my friend MBS (Crown Prince) of Saudi Arabia, who spoke with President Putin of Russia, & I expect & hope that they will be cutting back approximately 10 Million Barrels, and maybe substantially more which, if it happens, will be GREAT for the oil & gas industry!,” Trump tweeted.

Though Trump failed to give a time frame for the supposed production cuts, he later told reporters that he expected a deal soon. He added that he was also hoping to get more oil producers on board to trim production and hence boost prices.

Saudi Arabia’s press agency, for its part, on Thursday called for an “urgent” meeting with OPEC+ and its allies. A Kremlin spokesman, however, gainsayed Trump’s claims, stating that no production cut had been agreed to with the Saudis.

Oil markets not unsurprisingly skyrocketed on the news. Prices for global benchmark Brent crude increased 21% to US$29.94 per barrel, a new daily record.

US oil benchmark West Texas Intermediate (WTI) crude jumped a whopping 24.7%, hitting the $25.32 per barrel price point, the benchmark’s largest single-day gain in history.

Those market gains, however, were later pared as doubt mounted over the possibility of any deal and whether the US could contribute to production cuts.

Crude Oil WTI price per barrel measured in US dollars. Source: Trading Economics

There are several take-aways from Trump’s tweet and the possibility of a deal between Russia and Saudi Arabia, the world’s second and third largest crude oil producers and top two exporters.

The US, which now averages over 13 million bpd of production, is the largest oil producer in the world – though that lead will likely evaporate if oil prices remain at prices south of $40 per barrel, below the breakeven cost of most US shale producers.

Even with Trump’s tweet and a possible production curbing deal, oil producers face the same problem they have for years.

For the most part, the Saudis have shouldered the brunt of past production cuts, both OPEC and now OPEC+ deals – perhaps even unfairly as most in the kingdom allege.

Since the Saudis are the ones that usually agree to cut production the most, they also lose the most, including not only revenue but much coveted market share, especially in Asia where both Russia and fellow OPEC members fiercely compete.

In lock step, Saudi Arabia on Thursday quickly added that any new production-curbing deal would be contingent on US producers making cuts, a development which still seems elusive.

Saudi Arabia and Russia are locked in a fierce oil price war while the Covid-19 crisis dampens global demand. Photo: AFP via Getty

Most analysts agree that Russia and Saudi Arabia’s ongoing oil price war is as much about punishing US shale producers as it is about infighting between OPEC+ members.

Indeed, ever since OPEC’s first oil production cut in 2016, which aimed to shore up global prices that had dipped below $30 per barrel that January, US producers have leveraged the free ride of high prices to gobble market share.

That’s come mostly at the expense of Saudi Arabia, the market’s historic swing producer which also has the world’s largest spare production capacity.

Ryan Sitton, one of three commissioners for the Texas Railroad Commission which oversees the state’s oil industry, however, seems bent on finally bringing US production to the bargaining table.

On April 2, he tweeted that he had talked with Russian oil minister Alexander Novak about a possible 10 million bpd production cut. Texas, for its part, including the prolific Permian Basin, is the largest oil producing state in the US, representing 41% of total national production last year.

Three days earlier, Sitton opined that the oil market was 21% oversupplied. “That is almost ten times the amount we’ve seen in the last 40 years, he said during a webinar. “The most it was ever over-supplied or under-supplied was during the Middle East Oil Embargo, where it got up to 6%,” he said referring to the 1970’s oil crisis.

Workers stand on the platform of a fracking rig in the Permian Basin oil field on January 21, 2016 in the oil town of Midland, Texas. Photo: AFP/Spencer Platt/Getty Images

Moreover, a number of Texas oil producers seem to be falling in line with Sitton’s argument. Last week, two Texas oil producing juggernauts, Irving-based Pioneer Natural Resources, and Austin-based Parsley Energy, urged the Commission to hold a virtual meeting no later than April 13 to consider the possibility of oil production cuts.

For Texas producers to agree to trim oil production, albeit what some still claim is price-fixing, would mark the first time in nearly 50 years that the state-run agency would enact production cuts.

The Commission, which has the authority to order cuts in oil production, said yesterday it would hold a virtual hearing on April 14 to consider using its authority to implement a state-wide oil production cut in response to oil prices recently hitting near two-decade lows.

However, without or even pending any US involvement in a Russian-Saudi deal, the biggest story in global oil markets remains historic demand destruction levels from the economic impact of the Covid-19 pandemic.

As much as 10 million bpd of global oil demand likely evaporated last quarter, while April presents a nightmare scenario headed into the second quarter. Consumption for the month could plunge from 15 million bpd to as much as 22 million bpd, Reuters reported citing several analysts.

Much of that demand destruction comes from the Covid-19 impact on the global airline industry amid a record drop in jet fuel usage. IHK Markit forecasted earlier this week that April is set to be the worst ever month for global jet fuel demand.

The twin dynamics of massive supply overhang and record demand destruction creates a worst case scenario for global oil markets for at least the rest of the year, depending on when the pandemic finally breaks.

Goldman Sachs, an investment bank, said on April 1 that around 20 million bpd of oil overproduction could be flowing into storage this month. If the bank’s forecast holds, global storage capacity could be filled within the next three months.

An oil and gas worker turns a valve amid a glut in global supply. Photo: Twitter

However, even if 10 million bpd of production is removed via an agreed output cut, storage levels will still fill up, just at a slower pace

A 10 million bpd cut will cause market supply and demand to stabilize faster than if markets eventually try to balance by forced production shut ins. A deal could also set a new floor for prices, possibly in the $30 range instead of the current anemic $20 range.

Without a production-slashing deal, $10 oil is still a possibility.