OPEC and Russia meet on Thursday to try to agree to record oil output cuts but their efforts to address the slump in prices wrought during the coronavirus pandemic have been complicated by mutual animosity and the reluctance of the United States to join the action.
Global fuel demand has plunged as much as 30% as lockdowns have grounded aircraft, reduced vehicle usage and curbed economic activity. Crude prices have slumped below the cost of production for many producers, including the booming U.S. shale oil industry.
U.S. President Donald Trump said last week a deal he had brokered with OPEC leader Saudi Arabia and Russia could lead to cuts of as much as 10-15 million barrels per day or 10-15% of global supplies, an unprecedented reduction.
Riyadh and Moscow, who fell out when a previous pact on curbing supplies collapsed in March, have signalled their agreement to deep cuts would depend on the United States and others outside a group known as OPEC+ joined in.
Trump leads the world’s largest producer but his administration has shown no appetite to mandate cuts in domestic supply. The U.S. Department of Energy echoed those views this week, saying the country’s output was already falling without government action.
Saudi Arabia and Moscow have yet to publicly indicate any agreement on reductions or how such a deep cut would be distributed among the Organization of the Petroleum Exporting Countries, Russia and other producers.
Asked if a natural decline in U.S. oil output due to weak prices could count as a reduction, The Kremlin spokesman Dmitry Peskov said on Wednesday: “These are absolutely different reductions.”
“You are comparing overall decline in demand with cuts aimed at stabilising global markets. These are different concepts and they could not be equalled,” Peskov said.
The OPEC+ meeting on Thursday via video conference will be followed by a meeting of energy ministers from the Group of 20 nations (G20) on Friday.
To figure out how a cut would be shared among producers, Moscow, Riyadh and others would need to agree on what output levels to use as a baseline for calculating cuts.
That issue has been muddied by a price war between Saudi Arabia and Russia that erupted after an acrimonious OPEC+ meeting in Vienna in March.
At that meeting, Russia refused to participate in cuts proposed by Saudi Arabia in response to the coronavirus crisis. In response, Riyadh said it would pump at maximum capacity and flooded an already oversupplied market with extra crude.
Saudi Arabia ramped up output to a record 12.3. million bpd in April, up from below 10 million bpd in March. The kingdom’s Gulf allies, Kuwait and the United Arab Emirates, also raised production.
OPEC sources said Riyadh wanted any cuts calculated from its record April levels. But Russia has said cuts should be based on first-quarter output before the price war began.
“The issue is still the baseline,” an OPEC source said.
Russian TASS news agency said any cuts could last three months starting from May.
Oil prices LCOc1, which fell to their lowest in almost two decades in March, are trading at below $34 a barrel, around half their level at the end of 2019 before the coronavirus pandemic prompted governments to tell people to stay home and fuel demand plummeted.
— Reuters