"Oil War: It's Not Over Until It's Over"... Production Cuts Face Numerous Obstacles

[Asia Economy Reporter Naju-seok] Although there is growing anticipation for a dramatic agreement between Saudi Arabia and Russia, who have been engaged in an 'oil price war,' experts still see many hurdles to overcome before production cuts can be realized. There is significant skepticism about whether oil-producing countries will agree to sufficient production cuts amid the sharp decline in crude oil demand caused by the novel coronavirus disease (COVID-19).

The biggest variable is Russia. On the 2nd (local time), President Donald Trump effectively confirmed the production cut negotiations between Saudi Arabia and Russia via Twitter. However, Russia has not clearly stated its position. Dmitry Peskov, spokesperson for the Russian Presidential Administration, said, "No country has proposed discussions first regarding a new negotiation framework that could replace OPEC+, the discussion channel between OPEC and non-member countries." He explained that for production cut talks to take place, there must be contact between Russia and Saudi Arabia, but no high-level meetings had occurred by the 3rd.

Accordingly, it remains to be seen whether Saudi Arabia and other OPEC+ member countries, including Russia, will attend the emergency meeting.

Who will bear the burden of production cuts is also a key issue. Oil price experts believe that even if Saudi Arabia, Russia, and others discuss production cuts, there are still many factors to consider. According to President Trump's explanation, oil-producing countries such as Saudi Arabia will need to reduce daily crude oil production by 10 to 15 million barrels.

This is no easy task. The production cut target proposed by Saudi Arabia and others earlier last month was 1.5 million barrels. Even that figure faced opposition from Russia and others, preventing an agreement. Cutting 15 million barrels, which is ten times that amount, is an even more difficult challenge. Fifteen million barrels represent about 15% of the world's crude oil production. John Kilduff of energy investment firm Again Capital said, "There is still considerable skepticism in the market," adding, "The production cut target is simply too large. Saudi Arabia has already made it clear that it will not bear the burden of cuts alone, so various oil-producing countries that have been reluctant to cooperate must be made to shoulder a significant share." Even if there is agreement on the need for cuts, who will bear how much of the burden is another matter.

In particular, the United States has not expressed any intention to participate in production cuts. There is a high possibility of dissatisfaction regarding the fact that while Saudi Arabia and Russia are being urged to cut production, it remains unclear whether the U.S. will be subject to such cuts. Daniel Yergin, Vice Chairman of market research firm IHS Markit, said, "Both Saudi Arabia and Russia are interested in whether the United States, the world's largest crude oil producer, will participate in production cut discussions," adding, "We believe this will not be easy."

However, there is also a strong view that the U.S. will eventually join the production cuts. It is expected that production cut issues will be discussed during President Trump's meeting with executives from the U.S. oil industry. Considering that the U.S. shale industry is facing a chain of bankruptcies due to low oil prices, it is said that it will be difficult to ignore the implicit demands of the market.

Whether the scale of production cuts can respond to the decline in demand is also a problem. With the global economy virtually paralyzed by COVID-19, there are forecasts that daily crude oil consumption will decrease by 30 million barrels. It will not be easy to resolve the oversupply situation caused by demand reduction through production cuts alone. Roberto Castello Branco, CEO of Petrobras, said, "In the medium to long term, OPEC is not demonstrating price-setting power," adding, "Discussions on production cuts will not affect oil prices."