Oil: US Cover Key to OPEC+ Agreement

Published on April 2, 2020

The tweet by President Donald Trump earlier this morning that he spoke to “my friend MbS (Crown Prince) of Saudi Arabia” and that he “expects and hopes they will be cutting back approximately 10 million barrels, and maybe substantially more,” at first glance seemed a highly dubious assertion, at least that is until an equally stunning tweet by the head of the Texas Railroad Commission that he too will soon be talking with MbS and had already spoken with Russian Energy Minister Alexander Novak.

** As hard as it still is to fathom where exactly the 10 million barrel figure is coming from – both Saudi and Russian sources tell us they are baffled by the figure — there are in fact extensive and pivotal negotiations underway at a “working level” between all the key international oil powers, in which “gingerly taken” steps and gestures are pointing to the resumption of a tortuous path back to a broader OPEC+ output agreement to begin draining some of the vast oversupply of crude from global markets.

** The Trump tweet may have blown the progress of the talks way out of proportion, or have elevated expectations to the point of even derailing the delicate nature of the talks. But the President’s tweet nevertheless does point in the direction we think that is building in momentum towards the Kingdom, and MbS specifically, finding a face saving way to pull back from the current flooding of the international oil markets.

** The starting gun to what ultimately will have to be a Saudi-led return by the OPEC+ oil producers to a renewed cut in output will be the scheduled meeting at the White House tomorrow between President Trump and the gathered US shale producers and US International oil companies. We believe President Trump will press them tomorrow to agree to some form or degree of domestic cuts in their collective output.

** Even if US production is curtailed as a de facto result of the lack now of any more storage capacity for all that excess crude, we understand that some sort of cover from the US, even if token, is what the Crown Prince will be grasping as a gesture on which further momentum can gather pace, as with the affirmation by Iraq and Mexico they would be sympathetic to a new oil output understanding.

** We would thus take the statement by the Saudi Press Agency that the Kingdom is seeking an emergency OPEC+ meeting as strongly underscoring the credibility of the Trump tweet, even if the figures are a bit odd; indeed, the key sentence in the SPA statement was that the renewed Saudi effort “to restore the desired balance of oil markets” (albeit after they wrecked it) was “in appreciation of President Donald Trump of the United States of America’s request and the US friends’ request.”

** We believe Saudi Arabia would be prepared to follow a US gesture with its own cuts from the huge surge in oil output, currently in excess of 12 million bpd, all the way back to its 9.8 million bpd output at the end of February, and perhaps with further cuts from there. The United Arab Emirates and Kuwait could, we understand, add another 500,000 bpd in output cuts in a reversion to the previously scrapped agreement.

** A critical linchpin will again be Russian participation in the collective output cuts, and for their cuts to be real, not nominal, and as much as 500,000 bpd or more, certainly if the rest of the non-OPEC member cuts are added into the mix. All told, there could be some 4 million bpd in collective output cuts by the time an OPEC+ emergency meeting is potentially pulled together in the coming weeks.

** But Russia had made it clear in the working level discussions their position remains the same: that, ultimately, market share is more important than price and that they will adhere to contractual obligations with their customers, meaning any agreement to output cuts will need to be carefully shared across all the major players in their respective markets. The inclusion of US producers is thus an important element to a broader global understanding.

** While it is true that Russian President Vladimir Putin has not spoken directly with MbS, as the Russian press agency has reported, nor does he intend to, the Russian President has in fact spoken at length to President Trump, while Energy Minister Novak have spoken with other Saudi officials, including Abdul Aziz bin-Salman, the Saudi Energy Minister and half-brother to the Crown Prince, and to Khaled al-Falih, the former energy minister who Novak worked closely with and holds in high regard and trust.

** As we previously reported, Putin remains furious with MbS and blames him for the collapse in oil prices, and conveyed to Chinese officials that while ready to talk, he would refuse to speak to the Saudi Crown Prince directly without an apology and taking responsibility for the current crisis in the oil markets (see SGH 3/30/20, “China: President Xi, King Salman, and President Trump”).

** Indeed, in a phone conversation yesterday between Putin and Chinese President Xi Jinping, we understand that Putin briefed Xi on his conversations with President Trump, and that he agreed with the US President that current crude oil prices are not in the interests of the US, Russia, or the rest of the world.

** But sources in Beijing say Putin rejected Trump as a mediator between Russia and Saudi Arabia, stressing that Russia is a victim of the ongoing oil price war and can withstand the current low oil prices. More to the point, Putin argued it was Saudi Arabia that launched the oil price war and, he added, the Saudis will to shoulder the overwhelming burden of the output cuts.

** Chinese officials concluded that Russia is prepared to continue its oil price war with Saudi Arabia and that the only way to stop the oil price war in April would be for Saudi Arabia to compromise. In addition, Chinese sources dispute speculation in the markets that China has purchased large quantities of crude oil in recent days.

** That is where the Trump discussions with MbS and scheduled meeting with the US shale producers enter into the geo-political equation: Putin’s “apology” from MbS would in effect come in the form of a long Russian sought indication from the US producers of some level of participation or “adherence from a distance” in any future OPEC+ agreement.

** Saudi Arabia has already been hitting the wires with pronouncements that it wants other non-OPEC producers – the US, Canada, Mexico, and anyone else with an oil well in their backyard — to join any upcoming OPEC+ meeting, and that yes, Russia will still have to agree to meaningful real output cuts. The addition of other non-OPEC participants, especially the Americans, is the key to the face-saving efforts by MbS.

** And finally, purchases of crude oil to fill the various Strategic Petroleum Reserves managed by the US and the European Union, as well as China, could also be a factor in the negotiations aiming to support oil prices and to inch supply and demand towards some sort of a more stable equilibrium.

** We also understand that the Crown Prince has been pressing for US guarantees of its support for his eventual succession as King following the swirl of rumors that led to the arrest of senior Al Saud princes with close ties to the US military and intelligence communities (see SGH 3/9/20, “Saudi Arabia: Lifting the Veil on the “Coup”), as well as more explicit security guarantees that would extend beyond whoever wins the US elections in November.

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