Less than a day before OPEC+ is supposed to meet virtually to discuss a potential new oil production cut agreement, some news reports indicate that Russia has all but dismissed the possibility already. Last time Russia gave warnings in advance that it would reject a deal—in early March of this year—the rest of OPEC+ ignored Russia’s warnings and pushed forward regardless, leading to a series of decisions that crashed the oil market. There is no indication OPEC+ is wiser this time. But the United States can try to salvage the situation.
CANBERRA, AUSTRALIA - MARCH 26: A view of members taking part on screen during an unusual G20 ... [+]
According to Financial Times, Russia is saying that it will not agree to a cut unless the U.S. agrees to mandated cuts beyond natural declines in production. The US is extremely unlikely to do this, because a mandated cut is impractical in the US, violates free market principals and would most likely be challenged in court by oil companies. Russia is setting the U.S. up as the scapegoat for a failed agreement, laying blame on the U.S. because the U.S. won’t do something that it can’t do.
Before the early March OPEC+ meeting Russia also indicated it would not accept a production cut deal. At that time, Russian president Vladimir Putin made it clear that his energy minister, Alexander Novak, did not need to press for higher oil prices. Saudi Arabia and other OPEC+ countries ignored the warning and pushed forward anyways. The market responded negatively when Russia did just as it hinted it would and when Saudi Arabia subsequently pledged to over-produce.
No one wants the price of oil to fall further, and the U.S. doesn’t want to be blamed for something that is not its fault. The U.S. should not be expected to make cuts—if it even could—since it never joined an oil market-setting group. Yet, Russia is setting up a situation where it could refuse, thus sending prices even lower, and subsequently blaming the U.S.
If the U.S. government fears Russia will refuse a cut right now, the U.S. could proactively manage the situation and call for a postponement of the virtual G20 oil meeting, which is now scheduled for Friday. The U.S. could simply say a meeting is premature and, in addition, mention that Friday is Good Friday, a holiday in much of the world. Ideally, the U.S. would get Canada, Brazil and perhaps others to join in calling for a postponement. The market would likely respond negatively, but not as negatively as it would if a meeting happened and failed to produce a satisfactory agreement. Don’t push a meeting if you can’t be sure Russia, Saudi Arabia and others will make an agreement that will satisfy the market.
