Oil-exporting nations to cut output 10 million barrels per day; after that, it’s tricky

Two days of virtual negotiations among a huge swath of the world’s oil exporters — an unprecedented development in the history of the global oil market — has come to an end for now with a pledge by more than 20 nations to cut their own output by a combined total of 10 million barrels per day.

That figure does not even come close to balancing a market that is undergoing a collapse in demand the likes of which has never been seen before. In its most recent Short Term Energy Outlook released this past week, the U.S. Energy Information Administration, which tends to be conservative, saw April consumption dropping more than 18 million barrels per day between December and April off a base of a little more than 100 million barrels a day. It sees almost complete recovery by December 2020; that is not a widely shared view.

By late afternoon Friday, reports from various news sources were that the so-called OPEC+ group was still planning on a 10 million-barrel-per-day cut that it had agreed to Thursday. OPEC+ is a group that dates back loosely to 2016 and includes the OPEC nations as well as a group of oil exporters unofficially led by Russia. But on Friday, there also was a virtual meeting of the energy ministers (or in the case of the U.S., the secretary of energy) of the G-20 nations. That would include such major producers as Canada, the U.S. and Brazil. 

As news trickled out over the day Friday, it was essentially impossible to get a handle on how markets were reacting to what they heard. Good Friday is one of the few weekdays of the year when there is no trading on the world’s major exchanges. They’ll kick back into action late Sunday.

According to reporting from S&P Global Platts, Russian oil minister Alexander Novak told a Russian television station that the agreement to cut 10 million barrels per day was in place. That was the deal that came out of the Thursday talks and mostly involved Russia and Saudi Arabia agreeing to put down their swords in their ongoing price and market share war and instead make cuts in their output, along with other nations.

The price declines from that price war are staggering. Since the year’s highest prices just after Jan. 1, WTI crude on Thursday had declined about 61% to stand at $22.76 per barrel. Ultra low sulfur diesel on the CME exchange was down about 51% to 97.26 cents a gallon. It is those sorts of numbers that have led to a cut that at 10 million barrels, even if that is inadequate given the collapse in demand, is far more than any OPEC or OPEC/non-OPEC policy has ever attempted.

According to Platts’ coverage, the members of the OPEC+ group would cut 23% from what they were producing in October 2018, which was the high-water mark of OPEC output and saw global output at a peak of about 102 million barrels per day. Russia and Saudi Arabia’s cuts would come off a baseline of 11 million barrels a day. Saudi Arabia already was at 10.15 million barrels per day in March and has been lower. Russia was at 11.38 million barrels per day in February. Both nations would be expected to get down to 8.5 million barrels a day for the first two months of the deal, which kicks in next month. There is then a sliding scale of cuts through the year.

The difference of opinion in the market on whether these cuts would actually meet their goal could be summed up in two separate quotes. “Everything they’re doing is still not sufficient to deal with a 20 million-25 million-barrel-per-day drop in demand,” Platts quoted Jason Bordoff, director of Columbia University’s Center on Global Energy Policy, as saying on a recent webinar.

And then by contrast, Ann-Louise Hittle, a vice president at the consultancy of Wood MacKenzie, said the deal “even if poorly implemented … is substantial and will make a difference to the market.”

Novak was also quoted as saying he expects other producers — unidentified but presumably some of the G-20 members on the Friday call — to chip in an additional 5 million barrels per day in cuts. If that were the case, the cuts are about three-quarters of the way to a loss of 20 million barrels per day in demand.

News reports Friday focused on a somewhat bizarre dance between Mexico and the U.S. about whether they would contribute cuts. Mexico was on the virtual OPEC+ meeting Thursday but resisted making any reductions in its current output of just under 1.8 million barrels per day. At one point, it exited the meeting. It eventually agreed to make a reduction of 100,000 barrels a day in production, though news reports said the OPEC+ group wanted it to cut 400,000.

Enter Donald Trump. The U.S. stance in these talks has always been odd because the federal government has limited capability to order any sort of reductions. The idea was floated that it could require cuts in production on federal lands, but that is not certain and would almost certainly lead to litigation. It also could damage oil reservoirs.

An earlier effort to help the U.S. industry by buying oil to store in the Strategic Petroleum Reserve faltered in the original CARES stimulus package though there were suggestions the government might try it again. But President Trump made comments during the day on Friday suggesting Mexico had agreed on the small cut of 100,000 barrels per day because the U.S. would compensate for the paltry Mexican cut by making an additional 250,000 barrels per day in cuts of its own.

Secretary of Energy Dan Brouillette’s stance was that U.S. output is likely to drop 2 million barrels per day — the number in the previously referenced EIA forecast — and that constitutes its contribution to the effort to cut output. So with limited capability to order a production cut and with the SPR fill uncertain, it wasn’t clear where the 250,000 barrels per day Trump spoke of was going to come from.