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Opec seeks grand bargain to lift prices amid pandemic 

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Via Financial Times

The US’s reign as the world’s biggest oil producer depends on Saudi Arabia and Russia agreeing to slash supply at crucial videoconference meetings on Thursday and Friday.

Financial markets will be on guard as Opec ministers try to end a market share war and lift oil prices devastated by the coronavirus pandemic and the collapse of fuel demand.

A grand bargain, involving producers from Iraq to Oklahoma, is needed to steady a sector that has provided the lifeblood of the global economy for more than 100 years.

US President Donald Trump has called for Opec and Russia to lead cuts of up to 15 per cent of global output. The G20 and International Energy Agency will be involved in the meetings. Officials in Texas and Canada say their companies could reduce supply.

While the momentum has built towards a historic agreement, it is far from clear a deal can be sealed — or whether the cuts would be enough to overcome the loss of almost a third of global oil demand.

Here are the positions of the key players ahead of Thursday’s and Friday’s meetings:

North American production could collapse without a deal

If Opec and Russia do not agree a deal, oil prices will sink to $10 a barrel and US output will be almost halved — from 13m b/d to 7m, said Scott Sheffield, head of Permian producer Pioneer Natural Resources, one of Texas’s leading shale companies.

“It would decimate the oil and gas industry in the US,” Mr Sheffield said, “with more bankruptcies happening faster”.

A deal would restore prices to $35 or more, but the producers would still struggle and the US would lose 3m b/d of supply, Mr Sheffield said.

That is what shale executives want Riyadh and Moscow to hear: the US government might not let shale producers join cuts with Opec, but production is falling anyway.

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Mr Sheffield leads one camp urging supply restraint in Texas. Harold Hamm, head of Continental Resources and a friend of Mr Trump, has lobbied for tariffs on Saudi and Russian crude, an idea also supported in Canada’s oil patch.

Mr Sheffield said the supermajors that opposed his pitch wanted $10 oil to allow them to snap up weaker rivals. Executives at bigger companies say independent operators spend too much money producing costly oil — and the market is exposing them.

What does Trump want?

Mr Trump likes cheap gasoline and does not like Opec — that has been his position for years. But his administration has also proclaimed a strategy of American “energy dominance” predicated on the US producing more oil than any other country. The price collapse threatens this.

Reflecting the contradiction, Mr Trump has lauded collapsing fuel prices as a “massive tax cut” while coaxing Riyadh and Moscow to start cutting supply to raise prices.

He is being assailed by lobbyists from across a divided oil industry.

Shale producers have urged him to suspend military aid to Saudi Arabia, impose tariffs on imports, hit Russia with new sanctions, or provide financial assistance to US energy companies.

Their bigger rivals such as ExxonMobil and Chevron say the free market should rule — and seemed to have Mr Trump’s ear after a meeting last week.

The White House has made two concrete moves. First, pushing a plan to soak up excess crude by giving access to US strategic oil-storage facilities.

The second is US pressure on Saudi Arabia, which called Thursday’s emergency Opec+ meeting almost immediately after Mr Trump claimed Riyadh and Moscow would agree cuts of 10m to 15m b/d.

Saudi Arabia wants to placate Trump, but win price war

Saudi Arabia’s public message has been clear since last month: it will cut production, but only if others do, too. Russia’s failure to accept those terms in early March blew up their four-year-old supply pact and triggered the price war — and may yet derail this week’s crucial meetings, too.

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A month of Saudi Arabia talking down prices and ramping up supply has followed. The kingdom says it is now producing 12.3m b/d, a record high in a market experiencing its biggest demand crash in history.

“It’s about time Saudi Arabia stopped giving everyone a free ride,” said one person close to the state energy company Saudi Aramco.

Mr Trump has changed the calculus. His pressure on Riyadh has forced a shift, said two people briefed on the matter.

But the kingdom still has its terms. New cuts must be global: not just Opec and its previous collaborators, but also North American producers, Brazil, and others.

The conditions may be deliberately set too high. If it results in only a small production deal, Saudi Arabia may hope to have done enough to keep its US ally on side, argued JPMorgan analyst Christyan Malek, while not derailing its long-term strategy to win back market share.

Russia: da or nyet?

A month ago, before the scale of the demand collapse was understood, Russia seemed happy to let prices fall to hurt the US oil sector. Igor Sechin, head of state-backed Rosneft and a close ally of Vladimir Putin, finally won an argument to ditch Opec deals and go for market share.

But Russia is now struggling to find buyers for its crude and the possibility of a prolonged period of oil at $20 a barrel — a third its price earlier this year — has unnerved the Kremlin, even if its economy is more diversified than Saudi Arabia’s. Its own domestic consumption is plummeting, and storage is filling up.

Russian news agencies reported on Wednesday that the country could cut up to 1.6m b/d of supply.

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Moscow could still block a deal. If it does join cuts, Russia wants all others involved as well, and rejects the idea that price-induced supply drops — like those under way in the US — should count.

It could also seek an easing of US sanctions or some other bargain with Washington.

“This whole meeting might just be for show,” said Bjarne Schieldrop at Swedish financial group SEB, arguing that Moscow and Riyadh could blame a failure on G20 countries and “get some political heat from President Trump off their backs”.

Why is the G20 involved?

The push to get other countries to cut has come, at least partially, from an unlikely source. The International Energy Agency, a Paris-based club of wealthy countries, was founded after the Arab oil embargo in 1973-74 as a bulwark against Opec’s attempts to raise prices.

But Fatih Birol, head of the IEA, argued that the scale of the oil collapse posed a risk to global financial stability and was too big for one group to tackle alone. So, with Saudi Arabia’s help as this year’s president, he has enlisted the G20.

“Such a big problem needs a collective response from around the world,” Mr Birol said. “It is a G20 issue.”

He has cajoled producers such as the US, Canada and Brazil to join the Opec talks. They intend to say production cuts made in their weakened oil sectors should count as their contribution to the collective effort.

The IEA argued it was even in the interests of small producers, such as Spain, to help stabilise the market by buying oil for their emergency reserves.

“It gives a strong message to the market that the global community takes this seriously,” Mr Birol said.

But a meeting aimed at effectively boosting oil prices faces hurdles. France, where the gilets jaunes protests were sparked by rising fuel costs, has yet to confirm its attendance.

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