Ahead of the much anticipated meeting of OPEC+ ministers aimed at cutting global crude production in the face of a demand collapse triggered by the coronavirus or Covid-19 pandemic, it has emerged that Russia may be willing to cut its output by 1.6 million barrels per day (bpd).
Citing the country's Oil Minister Alexander Novak on Wednesday (April 8), Russian newswire TASS said Moscow would make the move with its cut volume benchmarked against the country's average output for the first quarter of 2020.
Both in February and March, Russia produced 11.29 million bpd which implies the reduction would account for 14% of the country's current output. A spokesperson for the Russian Energy Ministry, while re-confirming the country’s participation in Thursday's (Apr 9) OPEC+ video conference meeting, scheduled for 16:00 CET (10:00 EDT), said there was nothing "further to add."
Creative math on the horizon? Russian Oil Minister Alexander Novak (right) with Saudi Oil Minister ... [+]
However, it is all about creative additions and subtractions to come up with a market appeasing production cut figure. Fuzzy math is likely to come into play in any case as Russia's contribution to original OPEC+ cuts was nominal.
Under terms of the OPEC+ production cap prior to the collapse of talks in March, Russia consistently produced on average 11.25 million bpd, according to Reuters data. That's despite promising to keep its quota at or below 11.191 million bpd. Only in May, June and July 2019, was Russia's output anywhere below its pre-December OPEC+ target, and that too was largely down to the Druzhba oil-contamination crisis.
Then there is Russia's insistence that a natural decline in U.S. production, caused by a slump in crude prices and shortage of storage space, would not count as a reduction but one it might end up accepting. In January, prior to the spread of the coronavirus pandemic, the U.S. was on track to produce 13.30 million bpd in 2020, according to the Energy Information Administration (EIA); an rise of 1.06 million bpd on 2019.
However since that forecast, U.S. production has been falling steadily in line with oil price declines. The EIA now predicts American crude production will decline by 1.75 million bpd or almost – hear this – 14% over the seven months from March to October 2020, from its current level of 12.74 million bpd before stabilizing.
But according to Dmitry Peskov, spokesman for President Vladimir Putin, a natural reduction of unprofitable shale production cannot count as a U.S. output cut.
"These are completely different reductions. You compare the general reduction in demand with reductions for stabilizing world markets. It's like comparing length and breadth," he added.
With the spirit of private enterprise driving U.S. production, a coordinated cut by sector players, vehemently opposed by several companies as well as industry lobby group American Petroleum Institute, seems unlikely.
U.S. President Donald Trump, whose initial suggestion of a 10-15 million bpd cut by Saudi Arabia and Russia sparked the latest round of oil producers' deliberations, has said that a "free market" will lead to a deal, and well the American drop is likely to match the Russian one in percentage terms.
Meanwhile, Saudi Arabia is indulging in creative math of its own. While keeping its talking shops open, Riyadh has loaded 18.8 million barrels of crude onto tankers for April cargo dispatches, and has upped its production to a record 12.1 million bpd.
At the December 2019 OPEC+ meeting, Saudi Arabia's headline production commitment was pegged at 9.744 million bpd till the end of March. Sources suggest Riyadh might propose to lower its production down to 8.5 million bpd. While this may be touted as a reduction of nearly 3.5 million bpd from current levels, in reality it would equate to around 1.25 million bpd if benchmarked against pre-March production levels.
Perhaps we can take it as a 13-14% cut from pre-March levels which is probably what it will be sold as, while the market contends with extra barrels moved by the Saudis at a discount for April.
Hypothetically, take the 1.25 million bpd at face value and throw in another 1 million bpd from other Middle Eastern exporters excluding Iran, and we'll get to 2.25 million bpd plus a nominal Russian contribution.
Throw in a mixed bag of 'promised' contributions from elsewhere within OPEC+ always susceptible to tinkering, plus whatever might naturally arrive in the shape of U.S. declines and we'll get to 10 million bpd touted by Trump, in itself a fuzzy number.
Much of the cuts, where executed, will not arrive in time for a dire April, and by the time they have an impact later in the summer a recovery could quite possibly be underway. Overall, a most 'Trumpian' affair should it all pan out but not much for a crude market in near-term decline to take comfort from.
