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OPEC+ Oil Production Cut Meeting: 3 Key Players And Where They Stand

By Ellen R. Wald, Ph.D.CommoditiesApr 08, 2020 03:08AM ET
www.investing.com/analysis/opec-oil-production-cut-meeting-3-key-players-and-where-they-stand-200520949
OPEC+ Oil Production Cut Meeting: 3 Key Players And Where They Stand
By Ellen R. Wald, Ph.D.   |  Apr 08, 2020 03:08AM ET
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OPEC and its OPEC+ partners plan to hold a virtual meeting on Thursday to discuss cutting oil production in the face of plummeting prices and a growing oversupply. About a month ago, the OPEC+ group seemed to have collapsed, but the sudden drop in global oil demand brought on by coronavirus closures, along with some well-timed pressure from President Donald Trump, appears to have incentivized Saudi Arabia and Russia to try to rekindle their OPEC+ partnership.

The market was initially optimistic about the prospect of a 10-15 million bpd cut in oil output that President Trump mentioned in his tweets last Friday. However, the process is not nearly as clear-cut as the President’s tweet described it.

Although OPEC+ has yet to meet, Saudi Arabia and the UAE have already indicated that any production cut from OPEC+ will also require the participation of other global producers. While 12 other such countries were invited to the OPEC+ meeting as observers, it is not clear which, if any, will attend. The U.S. has already declined to join.

Some analysts have been insisting that OPEC+ is taking a wise stance by pressuring non-OPEC+ producers to take part in cuts. Whether it is wise or not is irrelevant to traders. It is crucial to understand that this is an unprecedented maneuver. OPEC used to act on its own with rare requests for engagement from outsiders. In 2014, Saudi Arabia pushed over-production when it could not balance the market, but it did not make a serious attempt to pressure any producers except its OPEC partners. Then OPEC extended participation to OPEC+. Now, it seems that OPEC+ is insisting that all other producers participate with them—a major diversion from past behavior.

As has been the case at almost every OPEC+ meeting, Saudi Arabia and Russia are the key players. In a departure from OPEC’s traditional stance, the U.S. will apparently also play an important role. Here’s a look at each of these country’s positions:

Saudi Arabia

Saudi Arabia precipitated the one-day 30% drop in oil prices in March after it reacted to Russia’s anti-cut position by committing to more output and lower prices for some of its customers. That was a month ago.

WTI Futures Weekly Chart
WTI Futures Weekly Chart

Now, the Saudi monarchy is worried about its government revenue, especially given the current leadership’s ambitious spending plans and the government’s traditional role as provider for the people. The monarchy also must worry about how low oil prices over the long run will impact the price of Saudi Aramco (SE:2222) stock, which is currently publicly traded. 20% of Saudi citizens bought into the Aramco IPO, some with debt, based on the promise presented by the government. A low Aramco stock price could sour political sentiment.

Though the Saudi monarchy needs higher oil prices, Aramco is currently producing a record 12 million barrels per day. It is supposed to supply 12.3 million barrels per day, including 0.3 million from inventory. With demand as low as it is, the big question is whether Aramco has buyers for its oil in April and beyond. If not, prices will fall further and Saudi Arabia will look weak. Moreover, this high production rate leaves Saudi Arabia without its strategic spare capacity for the first time in decades. The kingdom announced plans to increase capacity to 13 million barrels per day, but that will take a while. For now the kingdom has left itself vulnerable without spare capacity. All of this would indicate that Saudi Arabia wants a production cut deal.

On the other hand, some speculate that Saudi policy is being driven in part by a desire to project strength against Russia. In that case, Saudi Arabia may continue its tough posture despite its own best interests.

Russia

Russia wants higher oil prices just like every other producer. Recently, Russia claimed that $40 per barrel prices are good enough for its budget, but the prices right now are significantly below that. This would indicate that the current prices are not good enough for the Russian budget, but can the producers agree on a cut big enough to get them above that $40 mark?

Russia does not want to be beholden to anyone else. Before the tiff between Russia and Saudi Arabia in early March, Russian President Vladimir Putin made it clear that he was ok with his energy minister, Alexander Novak, refusing any proposals for future cuts. Russia is not going to be part of any production pact that it cannot control.

We don’t know how desperate Russia is to raise prices just yet, but even if Russia does consent to a production cut agreement, the other partners have to be skeptical about whether Russia will meet its commitments based on past experiences.

United States

The United States has no mechanism for regulating oil production across the country. On Monday, Secretary Of Energy Dan Brouillette said, “In the United States we have a free market, and the industry will adjust on its own.”

Some states, such as Texas and Oklahoma, have regulatory authorities that can proration oil production within their respective states, but the process is complicated and state-based, not federal. There are a few other ways the federal government can try to curb oil output across the country, such as through environmental regulations governing, but any attempt to use regulations designed for environmental protection to regulate trade would be challenged in court.

Ultimately, the U.S. seems to be offering only one thing: a forecast for an organic, market-based decline in production. The EIA issued a new forecast on Tuesday in which it expects the U.S. will average 11.8 million bpd of oil output in 2020. This is a decline of 500,000 bpd from 2019 production. The EIA predicts that U.S. production will slowly decline from its March high of 12.72 million bpd over the next several months to 10.96 million bpd in October before starting to pick up again.

OPEC will likely have its own forecasts for U.S. oil output, but market watchers shouldn’t expect the U.S. to offer any so-called “production cuts” to OPEC+ beyond the EIA forecast for market-driven declines.

If the deal collapses, it very likely will be based on OPEC+ members’ frustration that they cannot compel other producers (like the U.S.) to act

OPEC+ Oil Production Cut Meeting: 3 Key Players And Where They Stand
 

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OPEC+ Oil Production Cut Meeting: 3 Key Players And Where They Stand

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Comments (32)
Orianta Natse
Orianta Natse Apr 09, 2020 8:51AM ET
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Oil prices will go up if the supply is cut. Nevertheless whichever way it goes markets work on expectations/perceptions therefore the expectation alone may be sufficient to increase oil prices.
Davie Syllabus
Davie Syllabus Apr 09, 2020 12:48AM ET
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According to game theory, it’s almost impossible to draw agreement on cuts. There are too many players and variables to make them under control.
Matthias Kiunke
Matthias Kiunke Apr 08, 2020 5:06PM ET
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Ms Wald, your info says you have a weekly newsletter? How to connect to it? Thank you
Ellen R. Wald, Ph.D.
Ellen R. Wald, Ph.D. Apr 08, 2020 5:06PM ET
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Sign up here: http://www.ellenrwald.com/energized-economy-newsletter/
Pedro Miranda
Pedro Miranda Apr 08, 2020 2:50PM ET
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Nice article, but I have a few doubts...  the premises, in general, tend to treat short and long-term scenarios as the same, but it's quite clear that today short-term is the thing. Also, overall feeling from the text that the saudis (thus, OPEC in practice) have clear leverage over all other players. How is it that they would be willing, in these extreme times, in need of government revenue, to agree on a one-sided cut?
Randy Matheson
Randy Matheson Apr 08, 2020 2:35PM ET
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Over 6000 independent producers in U.S. Consensus is impossible. The U.S. trades for oil for the refineries and sells the products for a profit. KSA for example benefits 1) arms trade 2) lower prices weaken Iran. The U.S. benefits with foreign policy squeeze in Venezuela but concessions to Putin, as Russia leaves.
Aqmal Zainal
Aqmal Zainal Apr 08, 2020 2:10PM ET
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Oil price will be going down due to my Technical Analysis chart break support .for sure . cheap as ***
Eddie Resphanto
Eddie Resphanto Apr 08, 2020 1:49PM ET
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what if the meeting does go on mutual agreement, does that mean there will be continuous declination in oil price. I fear it may likely hit rock bottom of $7 - $5 per barrel in few weeks.
Jack Again
Jack Again Apr 08, 2020 1:44PM ET
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Buying UCO with a tight stop just before the close today might be a good play.
Brian Cellars
Brian Cellars Apr 08, 2020 1:44PM ET
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Buying UCO at 2.05 earlier in the day with a tight stop was a much better play.
Big Toe
Big Toe Apr 08, 2020 1:38PM ET
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sounds nice....
Roque Fejeran
Roque Fejeran Apr 08, 2020 1:35PM ET
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what are some oil stocks ?
Yudiansyah Adhi
Yudiansyah Adhi Apr 08, 2020 1:31PM ET
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go to $40
Laksiri Flora Madushanka
Laksiri Flora Madushanka Apr 08, 2020 1:24PM ET
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👍
Lanre Lawal
Lanre Lawal Apr 08, 2020 1:14PM ET
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Great market analysis there. What amount of reduction in production is required to stabilize the market?
Kenneth Novak
Kenneth Novak Apr 08, 2020 1:14PM ET
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Prob 10M minimum
Don Getty
Don Getty Apr 08, 2020 1:14PM ET
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15 mil until economic activity return globally, then as people get out and about to more routine activities a draw down will start - then consumption and prices will rise , demand is the problem and storage for all the excess current production, a 10 mil cut buys tine for storage but if this goes into 2 or 3 months there will be more problems - all this is going to come down to everybody doig what they say they will - russia has a poor past track record
abdul kalim
abdul kalim Apr 08, 2020 1:14PM ET
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Halo mam can u plz update meeting timing
chakradhar reddy k
chakradhar reddy k Apr 08, 2020 1:08PM ET
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final result  is every country  wants higher  price ,  but  do not want to compromise  on  out put cut  for  short  term  till  pandamic fears  settle
David Cook
David Cook Apr 08, 2020 1:08PM ET
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right, and we all hold our breath while they bicker.
juhwa jung
juhwa jung Apr 08, 2020 1:08PM ET
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US shale companies must join. That would be more fair.
Nagaraj Raj
Nagaraj Raj Apr 08, 2020 1:07PM ET
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thank you for analysis
Mohamed Anes
Mohamed Anes Apr 08, 2020 1:07PM ET
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crude oil prices increase or digress?
dyp ganesh
dyp ganesh Apr 08, 2020 1:03PM ET
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unuseful no buyers present
Jenniffer Morillo
Jenniffer Morillo Apr 08, 2020 1:01PM ET
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Anyone know the time of this meeting?
Ahmad Shamseen
Ahmad Shamseen Apr 08, 2020 1:01PM ET
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Not announced yet
Maris Van der Velden
Maris Van der Velden Apr 08, 2020 1:01PM ET
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It is already announced, will be 10 am US time. 16 pm EU time.
George Abdelnour
George Abdelnour Apr 08, 2020 11:42AM ET
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Wonderful analysis 👍
Christian Boulais
ChristianB Apr 08, 2020 11:17AM ET
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As usual, very bright,  madame.  Is there other choices to KSA and Russia  than to continue the price war...They have to try to get frackers out as much as possible and maybe transform US oil industry to a more concentrated and maybe more controlable interlocutor?
Fereydoun Barkeshli
Fereydoun Barkeshli Apr 08, 2020 8:58AM ET
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Great article, as always insightful and rich. I am sure that neither Saudi Arabia nor Russia want to continue until there’s blood on the floor. Both countries have some half a trillion US $ in their wallets but shouldn’t be in a mood to exhaust all the money on an oil price war. As such they are both in the same boat. In between the United States is in a bad situation too. Shale is loosing the ground and President Trump needs Texas votes. OPEC members are restless and feel sidelined. This may look like the beginning of an end for oil market that we once knew.
State EMS
State EMS Apr 08, 2020 7:24AM ET
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Thank you!Great article.
chip isbell
Chip Apr 08, 2020 6:38AM ET
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The US has market regulations and controls on specific industries.   Look at power, airlines, ethanol for gasoline and farmers. If we are demanding OPEC cut we should lead by example as one of the top 3 producers and find a way to cut our own production.  Those left in the industry would benefit. As we import very little OPEC oil where are the teeth to make tariffs work?   Ellen, I always enjoy your well thought out articles.  Pretty sure I don't have the depth of your understanding of the market.
Ali Hussain Wagpura
Ali Hussain Wagpura Apr 08, 2020 6:17AM ET
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Very well said, clearity in understanding the situation.
 
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