“Great deal for all,” Trump tweeted. And so it may be, even though it goes against decades of American resentment of OPEC’s attempts to fix oil prices by allocating production. But pandemics make for unusual alliances — and this one was driven partly by Trump’s pragmatic political need to protect U.S. shale-oil producers and the banks that have lent to them from the economic vortex.
What’s intriguing is whether the oil pact will open a broader dialogue between Trump and Putin. Such discussions might include a new initiative on strategic arms control, joint efforts to contain the pandemic and cooperation against terrorism, Kirill Dmitriev, a Russian government adviser who heads its sovereign wealth fund, told me in an interview Monday.
“The [oil] dialogue has been incredibly successful,” Dmitriev said. “This deal is really an example of what’s possible if the U.S., Russia and Saudi Arabia work together. We can accomplish a lot.” He said the pact reflected a shared recognition that “unstable oil markets are bad for the world in general and for Russia, the United States and Saudi Arabia in particular.”
U.S., Saudi and Russian sources spoke about the agreement Monday, describing the behind-the-scenes maneuvers that led to Sunday’s announcement. For an administration that has often seemed to be stepping back from international leadership and cooperation as the covid-19 pandemic has spread, this latest move is emphatically leaning forward.
The production cuts announced Sunday by Saudi Arabia and the other 12 members of OPEC, along with Russia, totaled 9.7 million barrels a day in May and June. But with additional cuts by the United States, Brazil, Canada and other nations, the total reduction will amount to about 19.5 million barrels per day, according to a statement in Riyadh on Monday by Prince Abdulaziz bin Salman, the king’s son and the Saudi oil minister.
As big as these production cuts appear to be, they may not be sufficient to bolster prices much, given the collapse in global economic activity and energy consumption brought on by the pandemic. Indeed, oil prices nudged only slightly higher Monday, to just above $20 a barrel.
“It’s a good thing this agreement has happened, but the key thing is demand; the floor has collapsed under the market,” J. Robinson West, who heads an oil advisory unit of Boston Consulting Group, said in an interview.
Trump endorsed the 20-million-barrel reduction level in a tweet Monday: “If anything near this happens, and the World gets back to business from the Covid 19 disaster, the Energy Industry will be strong again, far faster than anticipated.”
Dmitriev said that to reach Sunday’s agreement, Putin spoke five times with Trump over the preceding two weeks, more than he had the entire previous year. Dmitriev, a graduate of the Harvard Business School, was one of several key intermediaries in the three-way dialogue that led to the pact.
What prompted Sunday’s agreement was a sense that the global oil glut and resulting price collapse were accelerating. “We forecast that without production cuts, prices would have gone below $10 a barrel,” Dmitriev told me. “That would have been devastating. It could have led to the collapse of many banks that had lent to U.S. shale oil producers. … The shock to the banking system could have triggered a major banking crisis.”
The oil-market disarray spread last month, as the pandemic began to choke economic activity, but Russia initially balked at a Saudi proposal to cut production. “We wanted to wait to see how much of a reduction would be necessary,” Dmitriev said. The Saudis responded angrily, by increasing production, and oil prices began a sharp fall.
To reach the agreement, Trump leaned hard on Mexico, which buys a huge financial hedge from Wall Street to protect itself against low prices, and thus doesn’t have as strong an interest as other producers in boosting prices. “Trump helped reach a good compromise with Mexico,” Dmitriev said. “The Mexico issue could have been a trigger for the deal to collapse.”
Whether Trump and Putin will move forward with meaningful dialogue on additional issues, such as arms control, is hard to predict, given the current political turmoil in the United States and abroad caused by the novel coronavirus. But Dmitriev said he expected that, in any event, the United States would continue cooperating with other oil producers on limiting supply and stabilizing prices.
Correction: An earlier version of this column referred to Kirill Dmitriev as a Kremlin adviser. He is the head of the Russian sovereign wealth fund. It also reported that Vladimir Putin and President Trump spoke five times in one week. The period of time was two weeks. This column has been updated.