The Prospect of an Oil Truce: What Will Russia, the US and Saudi Arabia Agree On?

On Thursday, April 9th, there will be Russian-American-Saudi talks to reduce oil production [note: this article was written before it was confirmed that the talks had indeed started, on April 9th. Updated information about the result of the talks can be found here – ed]. But at the last moment, the date could change. One thing is clear that sooner or later negotiations will take place. Simply because the US was the first, two weeks ago, to make it clear that it was ready for a serious compromise.

Washington, which has never participated in OPEC+ negotiations, giving others the “honorary right” to impose restrictions that benefited the American shale industry, which increased its oil market share, for the first time declared its readiness to consider reducing total world oil production by 1.5 million barrels per day (500,000 for Russia, the United States, and Saudi Arabia each). If the Americans are ready for negotiations, and Russia also does not mind, then the Saudis will work together, especially since Riyadh cannot fight a price war longer than a year or a half without fatal consequences for the budget and internal stability of the Kingdom. But it makes sense for the Saudis to stall for time as long as possible, as low prices can actually undermine the US shale industry (and that is Riyadh’s goal) only if they hold out for a long enough time (experts say a minimum of a year, but the Kingdom will not be able to drag out negotiations for so long).

In fact, negotiations are under way for a kind of “oil truce” (similar to the “water truce” that animals arrange in watering holes during a drought). Under the pressure of circumstances, the price war must be stopped without one side achieving a decisive result, which means that after a while, when the severity of the crisis goes down, it will resume.

It is obvious that when the war of oil prices was prepared and fueled, all its main participants did not adequately assess the prospects of the market. This can be seen from the simple numbers. At the failed OPEC+ meeting of March 6th, Saudi Arabia proposed to reduce production by 1.5 million barrels per day. The same figure of possible reduction was referred to by the US at the end of March. But there are conflicting signals coming from Washington. The US is ready to cut production, the US is not ready. Obviously, different parts of the American oil lobby have not yet reached a consensus. In early April, Putin said that negotiations to cut production could be constructive and yield results if a global reduction of at least 10 million barrels per day from the March level was agreed.

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The assessment of the prospects for oil demand has also changed dramatically during this time. At the beginning of the year, industry experts surely predicted an increase in demand of 1 million barrels per day. In March, the estimate of promising growth was only 500,000 barrels per day. In April, Putin already spoke of the prospect of reducing demand by 10-15 million barrels per day, and at worst by 15-20 million.

This discrepancy in estimates is due to the fact that at the beginning of the year the West was quite optimistic about the prospects of overcoming crisis phenomena in both its national and global economies. Despite the fact that a large enough number of domestic experts indicated that optimistic estimates were unfounded, it was impossible to give a 100% guarantee that the West would not be able to postpone a collapse into depression again by injecting trillions of “new money” into its economies. It is clear that in the long term a depression was inevitable, but expert estimates differed concerning the timing of its beginning. Therefore, oil industry experts, who focus their forecasts on official data from governments and international financial organisations (such as the IMF), carefully predicted a slight increase in demand.

However, it became clear in March that the crisis could not be resolved with money. This mechanism has exhausted its capabilities, its use has led only to a sharp deterioration of the situation. The coronavirus pandemic posed additional challenges to the global economy and the economies of the West. The delay in the response of Western governments to the threat of an epidemic has led to the development of a worse scenario for the disease (with mass diseases and high mortality). The forced hard quarantine led to partial economic paralysis and a collapse in international trade. The scarce resource at the disposal of states and international financial organisations was spent on combating the epidemic and its social consequences. It follows from the speech of the President of Russia that the forecast of the situation in the oil market, which is guided by the Russian government, has sharply deteriorated. No increase in demand is being discussed. Only the depth of a possible fall is discussed.

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In such a situation, all calculations that preceded the outbreak of the oil war cease to reflect objective reality. The losses, even for the winner, may be much more significant, and the acquisitions – much less than planned. Hardly any of the leaders of the largest oil exporters doubt the need for cuts. Bargaining is based only on how much to reduce total daily production, as well as how much reduction will fall on each. For example, Russia’s stated position is a global reduction of 10 million barrels per day, from which Moscow is ready to take on a million.

It is absolutely sure that our partners don’t like such an offer. Their proposals included lower overall reduction figures, with Saudi Arabia proposing to take a million from one and a half million barrels of global reduction, and Russia and other OPEC partners to ensure production cuts within the remaining 500,000 barrels per day, with the Americans proposing to divide one and a half million barrels of daily reduction equally between the United States, Saudi Arabia, and Russia. As we can see, the overall figures and proportions of the reduction in the proposals of Washington and Riyadh are close, but they do not at all fight against what Moscow insists on. The question is whether the initial proposal will be closer to a final compromise and whether Russia is in principle ready to “chop the tail of the dog in parts”, agreeing to cuts that are insufficient production in Moscow’s view if partners refuse to take the Russian approach as a basis.

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It’s not an idle question. On the one hand, if the cuts prove to be insufficient, there can be both a reduction in production and a lack of a positive result, in the form of a return of oil prices to at least $40-45 per barrel. On the other hand, because of domestic problems, both the US, where Trump has an election in the autumn, and his advantage as a result of the administration’s failures to fight the coronavirus epidemic, has ceased to be absolute, and Saudi Arabia, where oil money is responsible for filling the budget and, ultimately, the stability of the ruling dynasty, may not be ready for radical cuts. What to do in such a situation – opt for half measures, hoping that they can act at least temporarily, and then partners can be persuaded to agree to another reduction, or refuse any agreements until partners mature?

I think it is more profitable for Russia to negotiate anyway, otherwise it will be accused of deepening the global crisis and taking a destructive position. But this does not mean that it is necessary to negotiate urgently, immediately on April 9th. After all, it is necessary to push maximum concessions out of America and the kingdom, if not in terms of the volume and proportions of production reduction, then in other spheres.

Rostislav Ishchenko

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