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OPEC and Russia agree on cuts in oil production, in theory

Reducing oil output by 10 million barrels a day may be too little, too late to buoy the oil industry

An Austrian Armed Forces soldier wearing a face mask patrols in front of the Organization of Petroleum Exporting Countries (OPEC) headquarters in Vienna on April 9. (Christian Bruna/EPA-EFE/Shutterstock)

Members of OPEC, Russia and a handful of other oil-producing nations reportedly agreed in principle during a day-long meeting Thursday to cut production in May and June and end the current price war. Analysts say the proposed cuts are too little to make much difference as the global economy swoons, but mark at least a psychological step forward.

The tentative agreement discussed Thursday calls for the countries in the OPEC Plus group to reduce oil production by 10 million barrels a day, about 10 percent of global consumption before the coronavirus sent demand tumbling by as much as 25 or even 30 percent.

Underscoring the tentative nature of the reported deal, President Trump said Thursday evening that he had spoken by phone with Russian President Vladimir Putin and King Salman of Saudi Arabia after the conference.

“We’ll see what happens,” he said. “I would say they’re getting close to a deal. We’ll soon find out.”

The United States did not take part in the discussions, and unlike most of the countries involved cannot mandate formal cuts on its producers, but Trump and others have argued that U.S. production is declining anyway because of the drop in demand and steep fall in the price of oil. As recently as Wednesday, the Russians said they were unwilling to accept that argument.

The Kremlin criticized the American talk of “market-driven” cuts because Russia doesn’t consider them the equivalent of the supply reduction commitments of the OPEC Plus deal.

“You are comparing the overall demand drop with cuts aimed at stabilizing the global market. These are completely different things,” said Russian presidential spokesman Dmitry Peskov.

But by Thursday it appeared that the Russians, who have watched the ruble fall to the lowest mark in four years, had come to accept that production cuts are inevitable, and that managing them is better than passively letting them happen.

A truce in the oil-price war could come this week. U.S. energy firms are still bracing for a recession.

It was a month ago that Moscow set the stage for the price war by refusing a Saudi proposal to reduce output. Both countries announced they would step up production, and the price of oil fell by as much as 67 percent before starting to recover in April. The production cuts talked about Thursday are larger than those Moscow refused to consider in March.

Nonetheless, “a 10 million barrel per day deal is far lower than what the market needs at the moment,” Bjornar Tonhaugen, of Rystad Energy, said in a note. It will help in the short term, he said, because it will slow the topping off of the world’s storage tanks, but “it is a disappointing development for many.”

Goldman Sachs concurred. “Ultimately, the size of the demand shock is simply too large for a coordinated supply cut, setting the stage for a severe rebalancing,” it said in a note.

It suggested that the price for a barrel of Brent crude could still fall below $20, even with the deal. Late Thursday, it was just under $32, having been buoyed by hopes raised by the OPEC Plus meeting. In February, it was over $60.

Gianna Bern, a finance professor at the University of Notre Dame’s Mendoza College of Business, said any deal would be inadequate in offsetting the heavy debt and weak balance sheets of much of the oil industry, and she predicted a rough road ahead for many.

Oil and mining companies should disclose what they pay, the law says. Critics say the SEC is undermining it.

Representatives from U.S. refiners, who worried Trump would resort to placing tariffs on the foreign crude they process if there was no deal, struck a note of optimism.

"We're pleased more about the fact that the diplomatic process seems to be working," said Chet Thompson, head of the American Fuel and Petrochemical Manufacturers, which represents refineries in Washington. "Hopefully, this puts an end to talk of tariffs."

Sen. Kevin Cramer of North Dakota, who like several other Republicans in Congress had been clamoring for trade protections for domestic drillers, agreed that the reported cuts were "encouraging and a step in the right direction."

While the White House has brushed off some industry proposals, such as blanket relief on royalty payments for drilling on public lands and waters, Trump has recently been talking up the idea of slapping a border tax on some crude imports.

The Group of 20 nations are conferring Friday, at Saudi Arabia’s behest, and some traders hoped that further cuts could be agreed upon at that meeting, which will include nations not in the OPEC Plus group.

Khurshudyan reported from Moscow.

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