HOUSTON – Oil-producing nations agreed on Sunday the biggest production cuts ever negotiated, in a coordinated effort like never before by Russia, Saudi Arabia and the United States to stabilize oil prices and, indirectly, global financial markets.
Saudi Arabia and Russia usually takes the lead in setting global production goals. But President Trump, facing a re-election campaign, a falling economy and American oil companies struggling with falling prices, took the unusual step of getting involved after the two countries entered into a price war a month ago. Mr. Trump has made the agreement a top priority.
But it is unclear whether the cuts will be enough to increase prices. Before the coronavirus crisis, 100 million barrels of oil every day triggered global trade, but demand fell by around 35 percent. Although significant, the cuts agreed on Sunday are still far from what is needed to make oil production in line with demand.
The plan for OPEC, Russia and other allied producers in the group known as OPEC Plus will cut 9.7 million barrels per day in May and June, or close to 10 percent of world production.
While the planned cuts are slightly smaller than the tentative pact reached last Thursday, the agreement must bring some assistance to the struggling economies in the Middle East and Africa and global oil companies, including American companies that directly and indirectly employ 10 million the worker. Analysts expect oil prices, which jumped above $ 100 a barrel just six years ago, to remain below $ 40 for the foreseeable future. The benchmark price of American oil was just over $ 23 a barrel on Sunday night.
“This is at least temporary aid for the energy industry and the global economy,” said Per Magnus Nysveen, head of analysis for Rystad Energy, a Norwegian consultant. “This industry is too big to be allowed to fail.”
The agreement reached on Sunday was the result of more than one week of telephone conversations involving Mr. Trump; Saudi crown prince, Mohammed bin Salman; and President Vladimir V. Putin from Russia. Trump praised the deal, saying on Twitter that it “would save hundreds of thousands of energy jobs in the United States.”
Negotiations struck when Mexico refused to agree to an agreement made by Russia and Saudi Arabia, saying it would cut only 100,000 barrels per day and not 400,000. Saudi Arabia is strongly opposed to Mexico’s position, worried that if Mexico could refuse other people would follow.
Trump supports President Andrés Manuel López Obrador, gives vague promises that he will make a difference, and helps persuade Saudis and Russians not to ignore temporary agreements.
It was not immediately clear if the Trump administration made a formal commitment to cut production in the United States, but with the price drop, many companies in the country had reduced production. There is no international mechanism to strictly enforce such production agreements and fraud is common.
Major oil countries that are not members of OPEC Plus, such as Canada, Brazil and Norway, along with the United States, have cut production. The Department of Energy has said that American oil production will drop by at least two million barrels per day by the end of the year. Other analysts said the cut could eventually be three million barrels per day from the 13.3 million barrels per day produced at the beginning of the year. President Trump has expressed interest in buying oil to replenish Strategic Oil Reserves to further reduce supplies.
The oil crisis began a month ago when Russia refused to follow the cuts promoted by Saudi Arabia and other OPEC producers. In response, Saudi Arabia said it would increase production by three million barrels per day and flood the market. Oil prices and global stock markets fell sharply on the news.
The reversal of Russia and Arabia in recent days is a recognition that their stakes have caused economic wounds that they themselves suffered.
“There are miscalculations on both sides,” said Ben Cahill, a senior energy expert at the Center for Strategic and International Studies. “Russia miscalculated how sharply the Saudi response was and they might be surprised by how deep the price reduction was.”
That change certainly must provide a lifeline for American companies because they invest far less in exploration and production.
“Hopefully, the American oil industry avoids the worst scenario,” said Amy Myers Jaffe, energy expert and Middle East at the Council on Foreign Relations. “There will still be bankruptcy, but for now, fears that there will be wholesale industrial destruction can now be ruled out, because the worst price war has passed.”
There is a possibility that oil prices will sink again in the coming days if traders are not satisfied with the new cuts. In fact, on Thursday, the last day of oil futures trading, prices fell sharply even though the deal was closed.
“The agreement gives hope of stability,” Rene Ortiz, Ecuador’s energy minister and OPEC’s former secretary general, said in an interview on Sunday. “But whether the market reacts accordingly is a different ball game.”
With a devastating economic pandemic around the world, several buyers are available in recent weeks to buy cheap Saudi crude. The kingdom stores some oil in Egypt and is forced to let unsold crude sit on tankers along its coast.
Increasing glut is a threat to the Saudi government’s finances. With a projected average price of $ 34 a barrel this year, Rystad Energy estimates royal revenues will drop 50 percent compared to 2019, a loss of $ 105 billion.
Saudi Arabia still has foreign exchange reserves of $ 500 billion, but it has shrunk from $ 740 billion in 2013. Several years of depressed oil prices have forced the kingdom to borrow money and reduce energy subsidies for citizens. Prince Mohammed now relies on his reserves to help diversify the Saudi economy for the future.
Russia is financially better than Saudi Arabia, especially with a flexible exchange rate – when the ruble depreciates, its export value rises. While it will also lose billions of dollars in revenue with a drop in oil prices, the government has a fiscal deficit that is far lower than Saudi Arabia and has $ 550 billion in foreign reserves.
But Russia has another obligation. It has limited processing capacity and refineries do not have adequate storage facilities. European demand has collapsed, and while China is still buying oil, at low prices, its storage will be filled in about a month away, leaving Russian crude oil stranded.
With thousands of Soviet-era oil and gas wells in western Siberia, Russia will face the possibility of closure and then return to wells that are expensive to manage, and in the process might permanently limit the amount of oil that can be recovered in the future. .
Uncertainty abounds in this industry because a pandemic disrupts the global economy.
OPEC members and their allies entered talks last week in hopes that the United States, Canada, and other Western producers would agree to explicit cuts, adding up to four million or five million barrels per day. In contrast, American officials only make guarantees that crude oil production will decrease over time, in addition to voluntary reductions that have begun in some U.S. companies. The agreement announced on Sunday will reduce 7.7 million barrels per day from July to December and then to 5.8 million barrels per day from January 2021 to April 2022.
American oil companies have eliminated thousands of jobs, blocked old wells and deactivation rigs and fracking equipment in preparation for the worst decline in more than a generation. While American consumers save at gas stations, oil-producing countries such as Texas, Oklahoma and North Dakota expect big losses in jobs and tax revenues.
Industry executives foresee a wave of consolidation, where small companies in debt are bought either by large companies or mergers.
“There will be some companies that will not survive,” said Trent Latshaw, president of Latshaw Drilling, an oil service company active in Texas and Oklahoma. “But the industry in general will survive and come out of this stronger. We have to make difficult decisions, innovate and we will be smarter because of this. “
The American industry was last shaken in 2014, when Saudi Arabia and its allies OPEC flooded the market with oil in an effort to weaken American shale producers who took market share from them. Prices fell and hundreds of American companies went out of business, and 170,000 jobs were lost. While American production fell briefly, it quickly recovered and grew.
Coronavirus is a new and bigger challenge, and it was enlarged last month when Russia and Saudi Arabia began their hostility. Russian oil executives say they are tired of losing market share to American producers. Saudi Arabia retaliated by promising to pour more oil into the market, taking a price of around $ 20 per barrel for a while, less than half the level at the beginning of the year.
But the fall in oil prices completely into single digits – something not seen in two decades – seems to have been avoided. President Trump’s recent public lobby in Russia and Saudi Arabia to reduce production helped raise the price of a few dollars per barrel, allowing many American companies to limit their losses.
Energy experts acknowledge Trump’s role in the deal.
“President Trump, who spent the last three years criticizing OPEC, became the de facto president of the producer group,” said Helima Croft, head of global commodity strategy at RBC Capital Markets.
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