US, WASHINGTON (ORDO NEWS) — Regulators of the American shale industry entered into dialogue with OPEC countries in the framework of negotiations that could help achieve a truce between the three largest oil producers in the world and potentially help resolve the price conflict between Saudi Arabia and Russia, which has collapsed oil markets over the past couple of weeks.
This was reported by sources familiar with the situation.
Mohammed Barkindo, Secretary General of the Organization of Petroleum Exporting Countries, spoke with Ryan Sitton, Commissioner for the Texas Oil Development Authority, on Friday March 20.
“I just spoke on the phone with OPEC Secretary General Barkindo. Great talk about global supply and demand, ”Sitton tweeted. “We all agree that an international deal should be made to ensure economic stability while we recover from [coronavirus infection] COVID-19.” This Texas official said that the head of OPEC invited him to the next meeting of this organization in June.
United States antitrust laws prohibit a formal deal, and so far there is no indication that the two sides will work together on production volumes. However, the Texas regulator is now considering reducing production in the largest US oil producing state for the first time in several decades, as several sources previously reported.
Seatton noted that he would first appreciate the international response to the idea of reducing production before taking further action. “I do not advocate that Texas take any steps on its own,” he said in an interview.
Meanwhile, Wayne Christian, chairman of the Texas Railroad Commission [oversees and regulates the drilling, production and transportation of oil in Texas – approx. Ed.], said that he had some doubts about the idea of reducing production.
American shale companies, which are burdened with huge debts and extract oil at a higher cost than producers in Russia and Saudi Arabia, were seriously affected by the sharp drop in world oil prices. Over the past few days, this has led to more active interaction between US manufacturers and OPEC, which President Donald Trump often accused of uncompetitive behavior.
US shale oil producers complained to Barkindo of falling world oil prices, and he also talked with Frank Fannon, a high-level energy department official at the Department of State.
Earlier in March, OPEC, led by Saudi Arabia, and Russia were unable to agree on a further reduction in oil production, which Saudi Arabia insisted on, considering it an effective response to lower demand caused by the coronavirus pandemic.
Moscow decided to strike at the American shale industry with lower prices, but was taken aback by the sharp reaction of Riyadh: Saudi Arabia promised to sharply reduce its oil prices and increase production. Amid this conflict, world oil prices fell below $ 30 per barrel.
According to Saudi officials, the decision of American manufacturers to reduce production will allow the Kremlin to declare its victory and push the Russians to resume negotiations with Saudi Arabia.
Riyadh officials expect Russia to eventually return to the negotiating table because low oil prices are negatively affecting its economy, but this will only happen if it has the opportunity to save face, according to sources in the kingdom.
One Saudi official said that “the best scenario would be if the United States pledges on all of this, and this will help convince all involved to work together.”
Meanwhile, the United States is considering other ways to soften pressure on US oil producers. The Trump administration is considering a diplomatic campaign to force Saudi Arabia to cut production and threaten to impose sanctions against Russia, according to sources familiar with the situation.
If American manufacturers decide to reduce production, this is unlikely to entail a quick settlement of the conflict between Russia and Saudi Arabia, as Saudi officials say. So far, Saudi Arabia has refused to confirm the presence of its representatives at OPEC meetings scheduled for early June, saying that these meetings will not lead to anything if Russia is not ready to reduce production.
Russian oil companies are also struggling with the effects of falling oil prices. Many producers may start to incur significant losses if prices remain below $ 30 per barrel, and some companies, such as the Russian giant Rosneft, are also experiencing difficulties due to US sanctions that were imposed after the annexation of the Crimean peninsula.
Over the past week, Brent crude oil – the reference brand – lost almost 15% in price, and its cost was $ 27.41 per barrel. In general, since the beginning of the year, the price of Brent crude oil has fallen by more than half.
As Kremlin spokesman Dmitry Peskov said this week, Russia would like to see higher oil prices and is always ready for negotiations, “especially in such dramatic times.” Russian officials say Russia can hold out even at an oil price of $ 25 per barrel, but analysts believe global prices will go even lower because all excess oil is now being stored and not consumed, as the coronavirus pandemic negatively affects demand.
According to officials familiar with the situation, Saudi Arabia will not be able to wage this price war for a long time. The kingdom has already had to cut its budget, and to implement its ambitious reform program, it needs to keep the oil price above $ 60 per barrel. As part of its plan of action in the context of a price war, the kingdom is preparing to increase supplies to its customers by 2.5 million barrels per day to offset the effects of low prices. But, according to Saudi officials, after June the kingdom will not be able to maintain such a level.
According to OPEC officials, this price war and the resulting unrest in the oil markets mean that when Saudi Arabia and other OPEC countries come together for the next meeting, they will likely have to agree on more significant production cuts than those for which earlier in March, Russia refused. This is due to a drop in oil demand caused by the epidemic of coronavirus infection, which swept East Asia, Western Europe and the United States.
“If the meeting takes place, it will discuss the issue of a substantial reduction. We have already passed the point where the reduction discussed several weeks ago was relevant, ”said a senior Saudi official.
The cartel may propose reducing production by a total of 6 million barrels per day – that is, no longer by 3.6 million barrels per day, which the parties were ready to agree to earlier in March.
“Russia will have to make more substantial cuts compared to those symbolic cuts that have been getting away with it for a long time,” said this Saudi official.
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