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Tom Kool

Tom Kool

Tom majored in International Business at Amsterdam’s Higher School of Economics, he is Oilprice.com's Head of Operations

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Why A 15 Million Barrel Per Day Cut Will Never Happen

Oil prices exploded on Thursday morning after US President Trump tweeted that he spoke with Saudi Crown Prince Mohammed bin Salman about a potentially ‘huge’ output cut. 

According to Trump, the production cut from Saudi Arabia and Russia could be as high as 15 million bpd. 

The reality, however, is very different. 

Earlier this morning, Dmitry Peskov, spokesman of Russian President Vladimir Putin told reporters that ‘’No one has launched any talks about a potential new oil-production deal to replace the OPEC+ format’’

Peskov assured reporters that no one is happy with current oil prices, but that there are no high-level talks scheduled for either Thursday or Friday.  

It seems then that US pressure on Riyadh has convinced Saudi Arabia to reopen negotiations once again, but as I wrote before, neither of the parties will be willing to hand an easy victory to the others.

While both Russia and Saudi Arabia have started to hint that they are willing to talk about new cooperation, neither of them have proposed any specific new deal.

The situation changed this morning after Saudi Arabia’s official news agency reported that the Kingdom is calling for an urgent OPEC+ meeting with the aim of ‘’seeking a fair agreement’’. In other words, Saudi Arabia is willing to return to the negotiating table if every other nation is willing to cut production. 

According to Dow Jones, Riyadh is willing to reduce output to 9 million bpd, roughly what it produced in February before the OPEC+ deal fell apart. It also seems that the Kingdom will only be happy to cut production back to 9 million bpd if Moscow agrees with the 500,000 bpd production reduction it rejected at the previous OPEC+ meeting in Vienna.

Even if Saudi Arabia gets Russia to agree to the 500,000 bpd cut (which remains unlikely), this means that the markets will see a production reduction of only 3.5 million bpd – a far cry from the 10-15 million bpd that President Trump claimed in his tweet this morning.

Even if Saudi Arabia gets the UAE, Iraq and other non-OPEC members such as Brazil, Canada, Kazakhstan, Norway, Mexico, and Azerbaijan to make additional output cuts, this will still not be enough to counter the coronavirus impact on the markets in the short term. All of this seems highly unlikely unless US producers will agree to force production cuts upon themselves (like Canadian producers did last year), something that US President Trump did not mention in his tweet.

Some smaller and larger US producers are happy to voluntarily cut back production, but oil majors such as ExxonMobil and Chevron have shown no interest in reducing production. Industry organizations such as the API and TXOGA also remain opposed to forced output cuts.

With global oil demand potentially crashing 30 million bpd in April/May, every producer is feeling the pain, but even a multilateral output cut that would involve all G20 producers isn’t likely to keep inventories from ballooning and prices from falling.

The oil rally caused by Trump’s tweet is likely to fade.

Update: 1.17PM CT - Russian Energy Minister Novak signaled that Russia, instead of cutting supply, will wait for demand to come back in the next couple of months.

By Tom Kool of Oilprice.com

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  • Bill Simpson on April 02 2020 said:
    If you believe ANYTHING Trump says at this point, you need to enroll in Trump University. Invest in the only public company he ever started. It might be a penny stock on the pink sheets somewhere.
  • Mamdouh Salameh on April 02 2020 said:
    A cut of 15 million barrels a day (mbd) will never see the light of day now or ever. Moreover, the sudden rise in oil prices today was no more than a jerky reaction to a bit of good news by a market which has been bereft of ones since the onset of the outbreak. It won’t last.

    President Trump is either misinformed about the dynamics of the global oil market or is deluding himself by talking about a production cut of 15 mbd by Russia and Saudi Arabia.

    Russia will never agree to cut its production by 500,000 barrels a day (b/d) though it might agree to delay its plans to raise production by 300,000-500,000 b/d.

    As for Saudi Arabia, it has never ever in its history had a production capacity of 12 mbd and will never ever achieve one either. It can at best produce some 8.0-9.0 mbd with another 700,000 b/d to 1.0 mbd coming from storage. This is so because its current production comes from five giant but aging and fast-depleting oilfields discovered more than 70 years ago. So the talk of its willingness to reduce its production to 9 mbd as Dow Jones was saying is a charade to say the least.

    Any future cuts will have to include the United States. In other words, neither Russia nor Saudi Arabia will ever allow US shale oil producers to gain market share at their expense and OPEC+’s.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London
  • Phil Mirzoev on April 02 2020 said:
    I agree with the author: nothing of this sort is gonna happen.
    In the recent past all that those cuts did is to give as a grant money to the US oil producers - that's all there is to it.
    It is, in my view, and absolutely valid question to ask: "why actually didn't Saudi Arabia and Russia stop these cuts years ago and tried to erase the US shale?". I guess this is because the shale sector had such a powerful "ventilator" in the form of a river of borrowed capital that it wasn't realistic and actually was premature.
    Saudi Arabia and Russia have waited till that shale thing (which was a piece of cavalier adventurism from the get-go from the economic point of view) has become flooded with debt, and now they are going to crush it - like really crush it - with the tailwind of the covid-related demand slump. Now they can have a reasonable confidence that after the shale crashes restoration will not be a symmetrical reversible process - not at all. There will be lots of pain for investors, who are even without it aren't particularly interested in those shale escapades anymore. Now Russia and Saudi Arabia can be reasonably confident that once crushed, the shale sector is not going to be resurrected in any foreseeable future - at least in the present form and on the present scale.
    As opposed to thoughtless and misleading headlines thrown up by the media like "Russia vs Saudi Arabia oil war", the only thing that is happening in total consistency with the natural interests of the parties, is a war against the US shale waged on both fronts at once - from Russia and Saudi Arabia, who both have the same interest: to pension off the US shale for good.
    What one would expect Saudi Arabia to say - a country that is politically afraid of the US? Like, "Oh, we are waging the war against the US shale!!". Of course not a single reasonable person would expect this kind of acknowledgements from Saudis (except for, probably, the media).
    What would one expect Saudis to say in a situation when they really want to tank the US shale? Well, they would say exactly what they did: "Oh, we are victims in this story, we are just forced to open all our valves and launch a river of oil - it is all because of Russia, Russia forced us" (and Russia would be absolutely OK with this finger-pointing too).
    There was lots of negotiations between Russia and Saudi Arabia in recent years, and it is a fair assumption that lots of those negotiations were dedicated mostly not to technical issues of oil cuts, but to POLITICS and POLICIES with their national interests in focus. And I, personally, have little doubt about the pivotal points that Russia was trying to explain to Saudis - points along the lines of "The US is screwing you with their shale oil and other things. Instead of you forcing upon the US oil prices you allow the US to dictate you what the oil price should be". Russia and Saudis have common interests, it would be actually surprising if they didn't use such a "gift of God" kind of opportunity to get back at the US shale with as much vengeance as possible.

    Nor do I buy the story about Trump's being worried about the shale sector per se: Trump doesn't give a flying kite about the US shale producers, and if he knew that the oil is going to be sustainably cheep for a long time at the price of annihilation of the US shale sector, he would have been the first guy to drown shale. All that Trump worries about is PRICE for oil. And now he is talking with Saudis and Russia not because he directly cares about the US shale, but because he knows that today's 20 USD/bbl can easily sky-rocket to 120 USD/bbl tomorrow - that's what his nightmare is, in my humble view. And probably that's what's gonna happen, because it is not only the US shale that will tank, but lots of oil production will be swept away too in many countries. Now the media are talking about the demand crunch on the oil market, but nobody wants to talk about the future supply crunch which can be gigantic too, with the peaks of 2008 revisited again.
  • Kris Poole on April 02 2020 said:
    @Phil Mirzoev:
    You are 100% right. Trump is a total MORON, when it comes to oil geopolitics. All he cares about is only low gas prices for consumers at the pump. I cannot comprehend, that he does not understand, how big contribution prosperous oil industry makes to the countries economies around the world. Price ~$75 dollars would allow every oil producing country to thrive economically, and would have not brake the economies of the importing countries.
    You are also spot on that, this is absolutely not a war between Russia and Saudi, but it is a war between Russia/Saudi vs U$ shell oil explorers/producers. If US shell will not come to the table on production cuts, because of the US policies (pump as much as you can, and tell others to cut back their output), this time around they will be crashed. It looks like super majors are happy with it, because they are waiting like scavengers to pick up the best pieces of the pie left after most of the shell is bankrupt. Most of the the writes on this side, just politically correct news and they push the so called "climate change" propaganda, spinning the news for their powerful masters. Just the commenters like YOU, and Dr Mamdouh G Salameh plus few others, bring some sanity to this conversation. Thank you.

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