Russia and Saudi Arabia Talk 15% Oil Production Cuts

Russia and Saudi Arabia are close to a deal to cut oil production. The economic shutdowns have cut demand for oil from 100 million barrels per day to 70-80 million barrels of oil per day.

34 thoughts on “Russia and Saudi Arabia Talk 15% Oil Production Cuts”

  1. …and then subsidize every other product too, keeping all the inefficient industries happily running along on government support. …?… How do you think that is going to end?

  2. The only thing Russia can do is pump oil. They aren’t going to cut back production. If they cap their wells they will have to re-drill them to get them back into production. Unlike shale, Russia doesn’t have an oil off switch. I do wonder what is going to happen when ALL ground storage and ALL tankers are full globally. Considering Russia’s environmental record I wouldn’t put it past them to create a lake of oil somewhere for “storage”.

  3. Please, move to Riyadh and feel the love in person. The US is the only reason the ME has been as “calm” as it has been for the last generation. With the US leaving all those repressed feelings and hatreds are going to find expression and no one is going to intervene. Just watch.

  4. Just to be clear, these scenarios were not something I was advocating. The bottom line was: in spite of not being part of the group, the US is a protagonist of the negotiation going on among OPEC + Russia, especially because Putin is trying to play 4D chess here; the decision they will ultimately take will be influenced by what’s decided in N. America (see what’s been happening between Canada, US and Mexico in terms of oil cut agreements).

  5. yes for sure, to clarify I was referring to how shale has changed the rules, while most of everyone else still operates under the old rules. There is enough of the shale with these conditions that has turned global production on it’s head. Places like KSA, Iraq you can still push a stick into the ground and oil comes out. Exaggerating a bit of course, but they have met their marginal cost competitors.

  6. Capacity used to be inelastic, not anymore.

    I thought this was contingent on the location and well type?
    The frackers are super elastic (at least physically) while the Russian permafrost stuff is not at all, with other producers being at different points in the spectrum.

  7. We are the second highest exporting nation on the planet…before tariffs. The tariffs have done nothing constructive for trade:
    Free trade works.
    We would stand a good chance of balanced trade today if it was not for the Tariffs we put in. That caused major retribution. China stopped buying our stuff. China bought soybeans from Brazil at higher prices…just because.
    Do you prefer a planned market or a free market? Free trade is free market for the World.
    We know the free market works…sometimes with some assistance and regulation. The fact is not all countries have the same resources, or climate. That makes it much more efficient to mine, grow, and manufacture things in other places. The less resources that are used in production the more there is produced for everyone.
    We have stupid tariffs. We have a tariff on sugar. Sugarcane is vastly better at producing sugar than producing corn syrup from corn. That hurts consumers. And consumers are us. If we did not have the tariffs and the handout for farmers to make corn syrup, farmer losses would be trivial. They would just grow something else or sell the corn to be used in the next highest paying way.
    What you are arguing for is to become like France or Italy, producing a small handful of luxury export products like Levis, and Harleys. That would be economically catastrophic.

  8. Tell me. Which domestic producer is going to increase production to sell it overseas for much less money than they are getting selling it here? We have passed break even on oil trade. We need to be a major exporter.
    We also import crude and turn it into other products like motor oil and sell that abroad. That would be killed.

    I think this is all part of the Russian calculus. They want us to put in tariffs. That would serve them well. They and the Saudis would continue to get all the money from exports while we get squat.

  9. This, it will bankrupt weaker companies and other just buy them up.
    As you say the oil is there, it just to stop the pump and restart it then this is over.

    Saudi tried to kill shale once, it failed, it only work if you keep the price down and don’t think Saudi Arabia can manage over time on $30 barrel either.

    Think Russia needs the money, its an pandemic going on and Russia is not in an position to just print government bounds.

  10. You think the ME is bad now? If the USA leaves for real … and it will soon enough. Well, lets just say I don’t think those warm warm people aren’t going to be kissing each other to celebrate the Great Satan leaving … espeically Saudi and Iran.

    It will probably be a blood bath but the USA won’t care. Not their problem anymore.

  11. The oil will still be there and so will the knowledge to access it. It is hard to weep for the rich investors and banksters involved. You can’t seem to see the difference between resources and the companies that exploit them. Also, President Donnie Dumb Ass can set tariffs on imported oil to support the frackers if they can manage to bribe him enough.

  12. Sorry, but none of this makes sense. Russia’s main market by far is Europe. Europe is being denied >800k bbl/day of Iranian and Venezuelan oil. EVERYONE (including the US majors) is trying to sign contracts with the European refineries to replace this gap (that is, what the refineries can handle, not all crude is the same). Obviously, demand has fallen off the charts, but that is only temporary. With the pricing crash, Russia and KSA hope to get new share of market. And so are US operators……However, oil is bought and sold largely through brokers as refineries don’t want to rely on anyone in particular and need supply flexibility.

    And no, KSA will never sell oil to China in yuan or donkey manure. Oil is traded in USD and handled by the brokers. Chinese refineries already by about 18% of their oil sourced from Saudi. Doubtful whether that share will increase given how refineries process oil. If anything, the new gas pipe to China from Russia is strategic, though it’s got a 20 year cost recovery…..

  13. “storing” means leave it in the ground. The cost of extracting, shipping and storing from one hole to another is huge. Russia is never gonna “break” the largest oil country on the planet the U.S.

    Russia joined the production glut to protect and grow their customer share in Europe. 70% of Russia’s crude exports go to Europe. US sellers are already getting into their turf and by pressing down the prices, Russia is trying to sign long term sales contracts. There is a big play to replace the Venezuelan and Iranian crude that the Europeans importers have been sanctioned by the U.S. (almost 800k bbl/day). I doubt the strategy will work. The European refineries are re-jigging their production to better handle US oil.

  14. leave it in the ground…..Already slowing production as the world has run out of places to put it.

    btw, “sharply limit imports” happens by itself. The refineries can only process so much and the SPR is already fully tanked. And except for the SPR, everything else is run by the private sector. It’s regular supply and demand. The SPR is only about 50 days worth of US refinery capacity.

  15. No. Crude is not homogenous. We import heavy, export light. US refineries are not entirely geared up to handle all US crude. btw 50% of imports come from Canada and the largest US refinery is owned by the Saudis….

    Your tariff idea would have zero impact on imports, except make it more expensive at the pump. Longer term is another story as US refinery capacity for light is increasing slowly but surely. Exxon is spending $20bn to eventually lead to US becoming a real net exporter of crude in about 3-5 years. Takes a little bit to build gigantic refineries…..have some patience.

  16. Predictable (disclaimer, I am seriously long oil). Contango play. There simply aren’t anymore places to store all the oil. Note the VLCC leasing spot rates, cut in half from a week ago to “only” $100k/day. Just trying to book a berth in China is at least a 5 week waiting list.

    Ergo, cut production. Saudis can play this game until the cows come home, and so can the US operators. The business these days is now all about marginal costing. Capacity used to be inelastic, not anymore. KSA marginal cost is about $1 bbl or less, and shale operators not that far behind.

    Now, demand dropped like a stone, tanks are now full, fasten seatbelts when economies go from idling (the lights still need to be on, there is a minimum level of demand) to overdrive.

  17. balancing the budget is not a goal, they deficit spend. Their production cost is < $8bbl. It’s about taking share away from Iran.

  18. Trump is already increasing purchases for the strategic reserve. However, there isn’t enough oil storage capacity in the World to handle all of the extra crude on hand. In fact most spare oil storage capacity is in the US which means the US acts like an oil storage sponge in more normal times. US storage capacity can’t even absorb excess US capacity at this point though. For this reason the US should sharply limit foreign imports at this point since there is no place to put excess production in most countries on Supertankers. The Saudis, Russians, US Shale will need to start shutting down production regardless of any deal in the not too distant future. The Russians don’t export to us and right now only the Saudi’s are sending massive amounts oil, because well at this point only the US can absorb more of the stuff, but not for long. Once the excess capacity is full production needs to shut down. Saudi is counting on this gift to force US and Russian producers to shut down first. For the Russians they don’t import oil and they don’t have a lot of extra storage capacity they just have to ride it out. For the US, well the US can deny Saudi Arabia the right to stuff its extra oil into US storage facilities, thus putting more pressure on Saudi Arabia to come to a deal.

  19. This protectionism argument is old and untrue. China is for example one of the most protectionist countries on the planet routinely banning foreign imports or charging tariffs in excess of 50% on goods where they want to develop a domestic industry such as automobiles. From 1812 through 1930 a small minor nation charged the highest tariffs on imported goods in the World. Only after this country had become the dominant economic power in the world did it start to remove the tariffs. That country of course would be the US, there is no factual data to support your statement. Time to toss free trade out where it belongs on the dust bin of history.

  20. Russia has the interest to be the needle in the global balance, always siding with the underdog. When China becomes too big, Russia will pivot to the West and preparations for this are already in the making.

  21. Because that’s how it works? Middle East conflagrations in ’73, ’79 and ’90 have seen recession and inflation in the West, so incumbent presidents have been majorly challenged and then defeated by newcomers. It’s not just a correlation, the causation is in the loss of consensus once things start going badly, for whatever reason: politicians actively/passively take credit for stuff they have no responsibility whatsoever for, but similarly they also get the blame when things go bad, regardless of their involvement.

    Better said here, from 40:29 to 43:25:

  22. How would we quickly ramp up whatever massive production you want to use to store it?

    Maybe investors or the federal government could buy up cheap oil and inject it into nearly depleted wells for storage? That’d have some losses, but probably it’d be cheaper than building thousands of new tanks, and small losses would easily be made up if the price of oil doubles. It might be a modification of fracking hardware – so keep those companies healthy by paying them to store it.

    I doubt it’d be long before Russia realized they’re just gifting us cheap oil, and give up their attempt to break US oil, if that’s really what’s going on.

  23. Sorry, why does a pretend conflict between Saudi Arabia and Iran lead to a leadership change in the USA?

    Would that even make the headlines in the USA at this point?

  24. The only thing that would happen if we did nothing is that one fracking company would be replaced by a more efficient one. That could swallow up some of the little guys, but that is how the market works.
    All protectionism does is make your companies less efficient, less capable of adjusting to changes, and guarantees we will never be the major exporter we need to be.
    That said, if a country is dumping with the intent of trying to kill our companies and jack the price back up after they are dead, the Fed needs to be a major buyer to soak up that excess. Make plexiglass. We are going to need a lot of that. Or tires. There are lots of possibilities.

  25. But all of our refineries are built there because we have stupid laws about transporting oil from American port to American port

  26. If Vlad wants higher oil prices all he needs to do is take out the oil facilities on Kharg Island and at Abqaiq. It would take years to bring those back on line.

  27. I thought it was Saudi that needed $80/barrel oil to balance their budget. Their production cost is around $30/barrel.

  28. Disagree about the tax, BUT,

    i would consider establishing a set $
    fir US oil, say, $35.00/barrel and only using US oil stateside.

    this keep an oil industry employed, making barely enough $ to keep the doors open, keeps gas at a low price for consumers.
    When global prices increase over $35.00/barrel, take the controls off.

    importing less expensive oil for strategic reserves

  29. I hear that Russian budget is balanced at $42 per barrel, not $80. I wonder if your number is for different type of oil. But I hear the same that they are really struggling with this low price oil.

  30. Regarding #2, why would Putin want his enormous neighbor to the south to become even more powerful, even at the expense of the US? If anything, he would want KSA to get desperate enough to cut a deal that gives him more power over them and OPEC.

    Meanwhile, US producers are slashing production, and Trump is meeting with oil industry figures who are probably desperate enough to accept anything that lets them survive.

    An oil import tariff that varies with the global market price of oil would be an obvious move, effectively pegging oil at ~$50/barrel domestically. Oil producers might have to accept a high windfall profit tax that leaves them just able to survive, and the refiners might get a rebate or credit for domestic oil purchases, since demand is down.

    Even the threat of an oil import tariff might be enough to make Russia and OPEC agree to cuts, rather than continuing to take big losses in a way that benefits the US government and doesn’t damage US oil producers.

  31. We CANNOT go back to being dependent on Middle Eastern oil and having to police the crazies over there. Time for a $15 a barrel import tariff for the next 6 months. It is good for the workers and good for National Security.

  32. I agree that Putin is a fierce competitor, and he will pull out all of the stops to claim victory.

    But this oil battle has been tough on Russia. They balance their budget on $80 oil. The country basically survives economically on the raw materials it can sell. And they are looking at big deficits for the foreseeable future.

  33. Russia’s only pretending to want a deal, but they’ll back out of it again and again until one of these options materializes:
    – US seriously cuts its production. Russia will push KSA to the brink until they convince their protector to accomodate the request for a global reduction in capacity. If this happens, Russia would have achieved a minor victory, reducing the capacity for oil diplomacy that the US is using against Russia in its own backyard (Baltics, Poland and Europe in general).
    – US doesn’t cut production, so a more and more desperate KSA is forced to get closer to China, selling oil also in yuans and perhaps buying Chinese bonds ‘n guns. This shift would constitute a legacy-defining victory for Putin, having tilted gloabl balance away from Western powers.
    – US doesn’t cut production, so a more and more desperate KSA just hits Iran first or manufactures an attack on itself to raise oil prices, even if it risks a major conflict. Iran might as well partake to the affectionate exchange, ’cause that would cause a change of leadership in the US and the hope to have sanctions lifted by a more reasonable leadership. However, there are so many tings that could spiral out of control in this scenario that even the most hawkish strategist will probably think many times over before even considering this one.
    – Vlad dies suddenly

    Unless one of these happens, Russia’s going to keep smiling and showing agreeableness, but they’re not going to give in, they’ll just enjoy the s’show.

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