Would Be New Deal For Substantial Oil Output Cuts?

The OPEC+ group, comprised of OPEC and non-OPEC producers, said that it is holding a virtual emergency meeting, or web conference, to allow the members to discuss the cuts in oil supplies. The Trump news about an agreement with the Saudis and Russians comes while Russia has so far shown less dependence on the oil exports than the US and Saudi Arabia. Still, Kremlin along with the Saudis said that if a collective oil cuts agreement is reached, they will comply. 

The oil war and current market 

After lifting Iran’s sanctions following the nuclear deal in 2015 and restoration of the country’s share in the global oil market, the oil prices dramatically fell. In response, some of the countries that seized the Iranian share while the US embargo was in place decided to reduce their supplies. The two major countries were Saudi Arabia and Russia. So, the OPEC and non-OPEC members in December 2016 agreed to cut the OPEC+ 1.2 million barrels a day. The Saudi share from the cut was 500,000 barrels daily. Non-OPEC producers cut 558,000 barrels a day. Russia said it cut its daily oil production 300,000 barrels. 

After the agreement, the oil prices moved up 10 percent. The cap on oil production was extended several times, with the last one being in 2019 and ending on March 31. 

The US, which since the presidency of Barack Obama embarked on a resolved policy to contain China worldwide, at the time tried to use the oil as an instrument for its political anti-China maneuvering. To this end, along with reinstalling the Iranian embargo and tightening Venezuela sanctions, the US unprecedentedly increased its oil output, turning into the world’s biggest oil producer in 2018. In the second month of this year, the US produced 13 million oil barrels per day despite the lower price. The supply was 110 percent higher than its supply in 2011. Russia and Saudi Arabia, consecutively producing 11 and 10 million barrels daily, ranked second and third after the US in 2018. 

Although the Saudi-Russian agreement cut the oil supplies in the global markets, the US declined to comply. It, thus, turned out the winner as it produced more and sold its oil at a higher price. Reacting to the situation, Moscow and Riyadh did not extend the cap deal. 

How much do major suppliers rely on oil incomes? 

The global demand for non-OPEC oil is 62 percent and OPEC oil is 31 percent. The pre-coronavirus assessments of the markets predicted that the world will demand 100 million oil barrels per day. Under this prediction, the OPEC share would reach 30 million in the second quarter, up from 28 million in the first quarter of the year. Upon the coronavirus outbreak, in response, the global demand was predicted to reduce 20 percent but the very latest assessments suggest that the global demand will drop to 35 million barrels a day as the major economies, along with the whole world, are struggling with COVID-19 pandemic. 

Although some experts argue that the drop in the demands will be short-time, this drop primarily hits the US shale oil industry. The US shale industry after 2015 managed to produce cheap oil, adapting itself to $46 a barrel, while once it was economical to produce only if the price was $65. As a result in 2019, the US produced 7.7 million from its shale oil which accounted for 63 percent of its total production. 

But this matter does not end here. Washington is expected to increase its shale oil even further as it projects cheaper oil for the next decade so it can force out of the market even such an ally as Saudi Arabia and fully control the market. The sanctions-hit Russia predicted this US intention and planned to scale down its reliance on the oil incomes. As the first response, it finalized its budget on a $42.5 oil barrel. That is while the International Monetary Fund reported that the Saudi national budget was written based on $85 for an oil barrel. 

New deal possibility 

As a comparison between Russia and Saudi Arabia, the hydrocarbons exports of Russia account for 64 percent of the country’s total exports. The oil and gas exports provide 46 percent of the government spending cash and account for about 30 percent of the GDP. In Saudi Arabia, the oil income provides 85 percent of the country’s income, 95 percent of the export income, and 42 percent of the GDP. On the other side of the story, the US shale oil industry is on the brink of collapse. So, in the new oil deal the US president is seeking the heaviest pressure will go on Saudi Arabia. 

Even though Trump said that he did not give any promise to cut the US oil production in any deal between Saudi Arabia and Russia, President Vladimir Putin of Russia in response said any oil cuts must be collective. He appears to have implied that the agreement will include cuts by the US. In his comments about the phone conversation with the American leader, Putin said that reduction in oil supplies should be based on collective cooperation principle. He added that Russia has no problem with $42 oil. Putin also said that very likely Moscow will cut oil production to 10 million barrels a day but this should consider the interests of all market parties. “It is under this principle that we can reach a fair agreement,” he continued. The virtual conference of the OPEC+ will wait for the official outcome of the Trump-Putin talks. By blaming the Saudis for the ongoing oil war, the Russian president seeks privileges from Trump. 

After the charges of collusion with Russia in the 2016 presidential campaign and the image he has so far shown of himself, Trump has not publicized any privileges given to the Russians. But it is clear to all that in the current conditions, Russia has the upper hand to the US and Saudi Arabia because on the one hand it has shown itself less dependent on oil and on the other hand it has designed its energy strategy of 2019-2035, in which the oil share will stay fixed but the gas share will increase. 

According to the Russian energy document, the gas production will increase to 983 billion square meters in 2035 from 727.6 billion square meters in 2018. This increase will be tuned with the exports of the country. The LNG (Liquefied Natural Gas) exports will reach 110 to 127 billion square meters in 2035 from 26.9 billion square meters in 2018. This planning is coming while Trump as part of the American sanctions on Moscow sought to block the Russian gas pipelines to Germany (Nord Stream 2) and Bulgaria (South Stream). Now the potential oil agreement will give Putin a good opportunity to block the Trump efforts to hamper the Russian plans to export gas to Europe. 

Trump put strains on Riyadh to cut oil supplies and accept a new deal with Russia by threatening that the US will pull out its forces from the region and cut its oil purchases from the oil-reliant Arab kingdom if Crown Prince Mohammed bin Salman fails to strike a deal with Putin. Some US oil refineries are supplied by Saudi Arabia and Canada. In the last quarter of last year, 10 percent of the US oil was provided by Saudi Arabia. While Trump still is not interested to talk about oil cuts under the new deal, some American oil companies have already expressed readiness to cut production. 

“Texas would agree to oil production curbs if the US President Donald Trump reached an agreement with international producers on cutbacks, a state energy regulator said on Friday,” Reuters reported. 

A new deal appears to be in the making, both sides of which are practically Saudi Arabia and the US and Putin is changing the Russian role to a balance maker so that he can push Washington and Riyadh to oil confrontation from now on. 

Russia predicts that the potential agreement would be short-term and the Americans will restore their production of shale oil to drive Russia and other rivals out of the market. So, Moscow is investing in its gas industry and trying to save the Asian oil customers who find it economical and cheap to import oil from Russia in the next decade.