G20 partners of OPEC+ nations can totally cut oil production by 3 mln barrels per day

TASS Russian News Agency | Apr 8, 2020 at 5:14 PM

MOSCOW, April 8. /TASS/. The plan of Russia and Saudi Arabia to extend the crude output reduction not only to OPEC+ nations, but only to G20 partners, may work, experts polled by TASS believe. The US, Canada, Brazil, Mexico, as well as Norway, could totally reduce crude production by 3 mln barrels per day. Without a new agreement, their output will drop anyways as there will be no available storage facilities left within a month or two, analysts noted.

The consequences of the failed OPEC+ deal, which allowed 24 countries exporting oil to limit production within more than three years, have become dramatic for the oil market. In March, the oil price hit 20-year lows, while the uncontrolled output growth threatened to fill the global oil storage facilities within a couple of months. The situation exacerbated as the global demand posted an unprecedented plunge amid the coronavirus spread around the globe. Meanwhile, the price of Urals crude, Russia's export blend, dropped to $10 per barrel.

By the end of the month, global oil supply had already exceeded demand by 20 mln barrels per day, an unseen situation for the market, analysts interviewed by TASS said. Storage facilities for oil reserves will only suffice for 1-2 months. Amid this background, Saudi Arabia chairing G20 this year has initiated resumption of the OPEC+ oil talks and insisted on engaging new partners from G20 countries in crude reduction.

Theoretically it could be possible to agree on production regulation with such large producers as the United States, Canada, Mexico, Brazil, as well as Norway, Fitch Corporations Department Director Dmitry Marinchenko said. Though Norway is not a G20 member, it has already confirmed participation in the talks as an observer. "Those countries totally produce almost 30 mln barrels per day. If each of them agrees to cut output by 10%, that means a reduction of 3 mln barrels per day," the expert noted.

Karen Kostanyan, an analyst at Bank of America Merrill Lynch, agrees that those five states can theoretically reduce output by 3 mln barrels per day. "If they do not cut (production) themselves now output in those countries will drop by around the same volumes in those countries anyways as there will be absolutely no storage facilities for that oil within two months," he explained.

If the US and Canada, the largest crude producers among those five nations, do not join the agreement, the remaining countries will be able to reduce production by 1 mln barrels per day at most, experts suggest. "Not so much compared to the demand plunge," Marinchenko noted. Crude production in the US may drop by 1.5 mln barrels per day without the forced reduction, but as a result of the price environment, Kostanyan said, adding though that agreed output cuts could help mitigate a sharp price decline.

Meanwhile, the United States cannot guarantee its participation in crude reduction, President Donald Trump who has initiated the oil talks between Russia and Saudi Arabia, has said recently. It is unprofitable for Washington to agree to cooperate with OPEC due to domestic political reasons, ACRA analyst Vasily Tanurkov said. First, the country cannot participate in cartel deals under the law, and second, neither the Democrats competing at the US presidential elections nor the population, for which low oil prices mean cheaper gasoline, will endorse such a deal.

Meanwhile, the authorities of the states of Texas and Oklahoma, which account for up to 90% of the total US output, may decide to reduce production independently, analysts suggest. Texas Railroad Commissioner Ryan Sitton earlier said that a certain decision on production volumes in the state might be taken on April 14.

Moreover, the US is considering an option of putting in quarantine the fields in the Gulf of Mexico due to the coronavirus spread there, WSJ has reported with reference to sources, adding that such a decision could withdraw up to 2 mln barrels per day from the market.

The scale of supply excess on the market makes it hardly possible for an agreed production cut by 10-15 mln barrels per day being negotiated now to change the situation overnight, experts told TASS. In view of this the deal may be organized in two stages, ACRA's Tanurkov said.

At the first stage, it is required that the biggest possible number of participants should reduce production during the global pandemic. However, after the quarantine measures are lifted, the agreement should be extended for a longer period to ensure a reduction of the accumulated reserves. "And if the first stage of the deal requires everyone's participation, even the US' in some way, it is unlikely that G20 and Norway will participate in the second phase," the analyst noted.