Oil producers unlikely to reach Trump's request for 15m bpd cut, analysts say

Oil demand fell due to a 76-day lockdown in China and Russia's reluctance to agree to deeper cuts, which led to the collapse of the Opec+ pact

Opec+ is set to convene for a virtual producers' meeting on Thursday. AFP

Oil producers will find it challenging to reach an agreement at a virtual meeting of Opec+ producers as deeper cuts for oil-revenue dependent economies could come at a high economic cost, analysts say.

The Opec+ alliance headed by Saudi Arabia and Russia is set to meet on Thursday after US President Donald Trump lobbied them to consider cutting back 10 to 15 million barrels per day of output.

Mr Trump's suggestion of record volume output curbs sent crude futures surging as high as 30 per cent last week.

His comments came amid a decline in oil prices, which fell 70 per cent from their peak in January.

The crunch in oil demand caused by the two-month lockdown in China, the centre of the coronavirus pandemic that has spread to nearly every country in the world, has hit air and land transport.

Countries have closed borders and grounded airlines in an effort to contain the spread of the infectious disease through quarantine measures.

Oil prices were also affected by Russia's reluctance to agree to deeper cuts – a move that led to the collapse of the Opec+ pact in March and prompted Saudi Arabia and the UAE to pledge to bring more supply to markets.

The producers sought to claim back the market share lost to about three years of production cuts.

"I think it makes sense for now to reach an agreement to eliminate at least the supply element and the decline in oil prices will in any way filter out some of the higher-cost producers," Ziad Daoud, chief economist for the Middle East at Bloomberg, told delegates at a virtual conference organised by the Arab Gulf States Institute in Washington on Tuesday.

The Opec+ meeting on Thursday will be followed by a virtual summit of G20 energy ministers on Friday.

The involvement of the US in any kind of production cuts – the world's largest oil and gas producer – could be challenging, noted Edward Bell, commodity analyst at Emirates NBD.

"Other producing countries that are dominated by a single state-linked producer have indicated they would be willing to support production cuts," Mr Bell said.

"But the US has no single national producer that could agree to cut output in a meaningful enough way to contribute to a 10 to 15m bpd agreement".

Norway and Brazil, which have state-backed companies, will participate in the G20 meeting.

However, the US energy landscape is dominated by thousands of independent shale producers who lack a single voice of representation.

In spite of advocating steeper cuts by Opec+, Mr Trump has been unwilling to single out his own industry for any significant contribution. He has said that the free market will decide supply and demand for crude.

US shale independents are already being squeezed, with one producer, Whiting Petroleum, filing for bankruptcy earlier this month. A refinery in Canada's Newfoundland province also closed while all refineries in Nigeria, an Opec member, were set to shut down on Wednesday.

Vandana Hari, founder and chief executive at Singapore-based Vanda Insights, said Opec+ would probably announce some sort of informal agreement "forged in advance" and rubber-stamped at the virtual meeting.

Should the meeting be delayed again, it would send a "major negative signal to the market", she said.

There is a chance that Mr Trump's ambitious request for cuts of up to 15 million bpd will not be met.

"The current 23-member Opec+ configuration could come up with six to seven million bpd of collective cuts, contingent on the US, Canada, Norway, Brazil and perhaps a couple of other producers pitching in with four million bpd or more, " Ms Hari said.

Nasser Saidi, of economic advisory company, Nasser Saidi & Associates, is even more sceptical of producers reaching a 10 million bpd reduction.

"That is impossible to achieve. They couldn't agree on 200,000-300,000 bpd reduction [in March], then no way anybody is going to agree on 10 million bpd. That's outlandish," he told the Arab Gulf States Institute in Washington conference.

He expects some sort of reduction that is unlikely to cause significant ripples in a market that has collapsed from low economic activity and a significant slowdown in transportation.