Money Matters

Opec discusses output cuts with US

Money Matters
By Derek Brower *** Anjli Raval
Mon, 03, 20

Opec has held talks with a Texas state energy regulator and US shale producers about co-ordinated cuts to oil output — an unprecedented move by some of the world’s biggest producers to counter the impact of the spread of coronavirus on fuel demand.

Opec has held talks with a Texas state energy regulator and US shale producers about co-ordinated cuts to oil output — an unprecedented move by some of the world’s biggest producers to counter the impact of the spread of coronavirus on fuel demand.

The approach came as President Donald Trump’s administration explores multiple avenues to stabilise oil markets domestically and as part of foreign policy efforts with counterparts in Saudi Arabia, the world’s biggest exporter.

Mohammed Barkindo, Opec’s secretary-general, held discussions with Ryan Sitton, one of three commissioners at the Texas Railroad Commission, on Friday, which followed separate talks with executives in the shale patch. The commission, founded in 1891, no longer oversees railways but regulates the oil and gas industry in Texas. In decades past it also set oil production rates in the state.

Mr Sitton told the Financial Times that Texas could offer to reduce supply as “a bargaining chip we can bring to the table” in discussions between the US, Saudi Arabia and Russia.

“I’m as ardent a free-marketeer as you’ll meet,” the commissioner said. However, the coronavirus outbreak and the collapse of oil demand meant that emergency measures were necessary, he added.

“I’m not going to negotiate with Opec in a vacuum, in the end it’s up to President Trump,” Mr Sitton said. “What I’m offering him is that if he wants to get a deal done . . . Texans will get around the table.”

Mr Barkindo has also talked to executives at leading shale producers including Pioneer Natural Resources, sources said. Pioneer did not respond to requests for comment.

Not all US producers — or members of the commission — were on board with Mr Sitton’s proposal.

In a statement, the Railroad Commission’s chairman, Wayne Christian, said: “While I am open to any and all ideas to protect the Texas Miracle, as a free-market conservative I have a number of reservations about this approach.”

The commission had not enforced proportional supply cuts in 40 years, he said, and lacked the technological capabilities to handle the process. The idea was also blasted by the American Petroleum Institute, the biggest US oil lobby group, whose membership includes supermajors such as ExxonMobil as well as smaller independent producers.

“We think imitating Opec is the wrong direction. Ultimately we believe quotas end up penalising efficient production,” said Frank Macchiarola, an API senior vice-president. He urged diplomacy from the US instead.

Asked who was pushing for supply restrictions, Mr Macchiarola said: “It appears driven by individual producers as opposed to the broader industry.”

Crude prices have more than halved since January and are now trading around $30 a barrel, a level analysts say will lead to a sharp contraction in US supply and trigger bankruptcies across the shale patch. It will also cause widespread pain in Opec producer economies.

Mr Barkindo has taken it upon himself to engage with shale producers since the 2014 price crash, but he mostly has a ceremonial role and no authority to compel Opec producers to cut their output.

Saudi Arabia is prepared to oversee extra supply cuts of several million barrels a day, according to several people familiar with the matter, but only if non-Opec producers including Russia take on their share of the burden — a point of contention at the most recent meeting of ministers.

The kingdom is preparing for an extended period of low oil prices as it persists with the price war that took Brent crude to a 17-year low this week. The government has told state energy giant Saudi Aramco to prepare for at least a year of production at maximum levels, of around 12m barrels a day.

Under pressure from oil executives and congressional representatives from oil-producing states, officials from Mr Trump’s administration have tried to persuade Riyadh to hold back supplies as it had done for the previous three years.

The president said on Thursday that he would “get involved” in the Saudi price war with Russia “at the appropriate time”.

Mike Pompeo, US secretary of state, will hold a conversation with his Saudi counterpart in the coming days and urge him to call off the kingdom’s oil-price war with Russia, according to people familiar with the matter.

Dan Brouillette, the energy secretary, has already held conversations with Prince Abdalaziz bin Salman, Saudi Arabia’s energy minister, to discuss the price collapse, according to an official in the Department of Energy. This week the US said it would buy 77m barrels of domestic crude oil for government stockpiles, with the Trump administration seeking congressional approval to spend $3bn buying these barrels.

Despite the co-ordinated effort to lift oil prices, analysts doubted it would work, suggesting the politics remained tricky and the sheer scale of the demand shock could wash out even large-scale cuts.

“Even if the US succeeded in pressuring Riyadh to ratchet back its crude production from all-time highs, given the unprecedented demand implosion it would only delay rather than prevent oil prices from diving toward curtailment levels that threaten US producers,” said Bob McNally, head of Rapidan Energy and a former adviser to the White House.


—The Financial Times Limited 2020