Trump Takes To Twitter To Press OPEC, Russia For Cuts

President Donald Trump is making news in oil markets around the world today with his comments on Twitter
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suggesting that Saudi Arabia and Russia are ready to bring an end to the price war that has contributed to the price of oil falling below $20 a barrel. 

His comments sent oil prices rising as much as 35 percent for West Texas Intermediate and nearly 50 percent on the international benchmark Brent. The president mentioned cuts of 10 million to 15 million barrels a day were possible. 

If true, that would be equal to a tenth or more of the roughly 100 million barrels a day the world uses daily – or did before the coronavirus whacked demand. Now everyone is waiting to see if the cuts materialize. 

Saudi Arabia and Russia have been coy since President Trump’s tweets. Saudi Arabia is calling for a meeting of the 24 oil-producing nations that make up the OPEC+ Alliance, which includes the 14 members of the Organization of Petroleum Exporting Countries (OPEC), and 10 other non-OPEC members, including Russia. 

Saudi Arabia said it wanted to reach a “fair agreement” to end the price war, which means that all producing countries share in the cuts – that’s been the key sticking point with Moscow. Russia walked away from talks with OPEC in early March in response to Saudi calls to shut-in an additional 1.5 million barrels a day through the end of the year to support prices. 

The Kremlin’s rejection of further cuts – their part would have been 300,000 barrels a day – should not have been a surprise to anyone watching the Kremlin closely. Russia didn’t meet its production cuts for most of 2019, so further cuts were going to be a hard sell from the beginning. 

Oil prices plummeted after Russia announced it was pulling out of the three-year-old OPEC+ Alliance and Riyadh responded by vowing to ramp up output by 2 million barrels a day beginning April 1. 

Now President Trump wants much steeper cuts that would seem unlikely if the market wasn’t reeling from lost demand caused by the coronavirus. That oil isn’t being asked for anyway, so cutting deeper now isn’t that hard of an ask.

The crucial element for a deal is that U.S. producers share in the output reduction and not continue to capture market share while the rest of the world bears the burden of the cuts. The market is delivering that result already.

And that is exactly what the leaders of the OPEC+ Alliance – or at least Russia and Saudi Arabia – wanted to see happen. The price collapse has shaken the U.S. shale sector, which doesn’t march to production limits but to the pipes of the free market. 

The OPEC+ members spent the past three years watching U.S. companies capture market share while they held back production to support prices. The free ride had to end sometime. Whether Riyadh and Moscow coordinated their moves or not, they are succeeding in pulling U.S. companies into a global pact to reduce the amount of oil on the market. 

We’re all part of OPEC now. 

Saudi Arabia and Russia clearly knew that the United States was running out of storage. With nowhere to put new oil and prices at rock bottom, the market would curtail new production without the need for anyone – not President Trump or the Texas Railroad Commission – to put a thumb on the scales. 

A downturn in shale output was in the pipeline already – even before OPEC+ deal fell apart. The U.S. rig count had been on the decline for most of 2019 and really made a turn in mid-October. Given the typical six-month lag between rig numbers and production levels, U.S. shale production was primed for a decline in March and April. The demand destruction from the global pandemic accelerated the drop, but it was coming either way. 

If anything, Russia and Saudi Arabia saw an opportunity to accelerate the slowdown and took it. They basically gamed us. 

If Saudi Arabia and Russia decide to get the OPEC+ band back together now and throttle back production, U.S. producers are along for the ride – whether they want to be or not. And they will keep participating because the market isn’t there below $45 a barrel WTI to support new drilling. 

President Trump can’t control U.S. producers, but he doesn’t have to. The industry is very responsive to market signals and no one is going to finance drilling new wells until oil prices are back in the profitability zone. 

The great story of shale’s expansion that has dominated headlines for the past decade is probably at an end, but the patch lives on. There will be the inevitable wave of mergers and acquisitions, and bankruptcies as the most debt-laden companies stumble. But those that remain in the shale patch when prices rebound will be stronger and more resilient.