Oil Public Lands (La Presse)

Trump Optimistic That Saudi and Russia Oil Cuts Will Save Industry

US President Donald Trump is eager to put an end to the Russia–Saudi Arabia oil price war that has helped decimate global crude prices. In a tweet Thursday, he said he is trying to broker a deal between the competing economic rivals. 

Trump Gets the Ball Rolling

“Just spoke to my friend [Mohammed bin Salman] 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!”

“…..Could be as high as 15 Million Barrels. Good (GREAT) news for everyone!” Trump added.

Although the American president was optimistic that an economic truce can be forged, statements from Saudi Arabia and Russia made it clear that such an agreement is not in the cards for the immediate future. Moscow denied that President Vladimir Putin had spoken with MbS, according to The New York Times. “No, there was no conversation,” said Dmitri S. Peskov, spokesman for Putin.

Saudi Arabia only said it would request a meeting of oil states. OPEC+, which includes Russia, will meet virtually on Monday, Bloomberg reported. Analysts do not expect the meeting to produce a deal, even if the parties can find common ground toward a workable framework.

“The more people are at the table, the more difficult it is to get a deal,” said Pierre Andorran, manager of the Andurand Commodities Fund. “I find it difficult to believe that a deal like that could be agreed quickly.”

US Shale is Currently on Life Support

To be clear, a meeting is the appropriate starting point, but it was at a meeting last month when Moscow balked at the idea of production cuts and walked out. Saudi Arabia won’t agree to any deal without reciprocal measures from Russia, said Amrita Sen, chief oil analyst at Energy Aspects Ltd.

“It’s very clear that Saudi Arabia is maintaining its position,” Sen told Bloomberg. “It will cut only if everyone else cuts.”

Despite the lack of firm details about a potential deal, Brent crude rose 21% on Thursday after Trump’s tweets before receding Friday morning. American oil executives were scheduled to meet with Trump on Friday to determine the White House’s role in helping the industry recover. Traditionally, the US oil industry is left to the individual state governments to oversee with the federal government staying free from imposing price and production limits.

However, 2020 is unprecedented: the oil price war created so much supply that producers are running out of storage while COVID-19 obliterated the worldwide demand. The US shale industry, once a booming market, has been forced to scale back production and layoff employees. Whiting Petroleum in North Dakota filed from bankruptcy protection this week, the first company to do so, but likely not the last as the global glut continues.

Congress and Industry Execs Scramble

Legislators and oil executives are unsure how to ease the industry’s pain. So far, they’ve mainly resorted to pressuring Saudi Arabia. As a staunch US ally, Washington has leverage over Riyadh. Consequently, both the administration and Congresspeople have made overtures to MbS. A group of senators wrote a letter to the crown prince and discussed options with the Saudi ambassador to the US. 

“All of the senators who were on that letter, on that conference call with the ambassador, have been strong supporters of the US-Saudi relationship,” said Sen. Dan Sullivan, R–Alaska. “That is going to change if the Saudis don’t start playing a more constructive role with regard to energy markets.”

Last month, Sullivan co-authored a bill to remove US troops from Saudi Arabia, a symbolic gesture of Washington’s discontent. 

Oil executives are split on tariffs on Saudi oil, an idea that has been pitched. While landlocked states favor restricting imports, states with access to ports have come to rely on the heavy crude from the Middle East.  

Will Cuts Really Save the Day?

If the US were to collude with Saudi Arabia, Russia, or OPEC+ to reduce production, there would be legal obstacles to overcome. In general, Washington does not have the power to enforce quotas among private businesses. Furthermore, if the industry banded together and created an OPEC-like consortium, it would run afoul of antitrust laws.

Finally, there is the outstanding question of whether production limits could even solve the crisis in its entirety. While overproduction is part of the problem, unless demand returns, prices will continue to remain low. As the COVID-19 lockdown continues throughout April, the future will remain gloomy for oil producers. Could oil prices begin to trend upward if production is cut? Certainly, but this would simply be a small bandaid on a gushing stab wound. 

Until people begin traveling again, prices will remain lower than pre-coronavirus. The real hope for oil producers will come in the summer as the virus threat hopefully subsides and people rush to explore the outside world again.