Analysis: Can Opec-Plus Pull Off a Deal?

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Should we believe all the headlines, tweets and comments about an expanded Opec-plus agreement? Energy Intelligence focuses on the drivers behind Opec-plus machinations rather than who says what each day -- an approach that tends to work better in assessing notoriously hard-to-predict Opec outcomes. This suggests the odds favor some sort of compromise, but as an ad hoc collection of emergency actions rather than a conventional collective agreement. There are too many moving parts to predict the outcome with confidence, but right now there is clear momentum in this direction. So what are those drivers? Over the past few weeks, we have been arguing that Saudi Arabia (a) has not abandoned market management permanently, (b) is determined to bring Russia and others to the table, (c) cannot afford a drawn-out price war and (d) would like resolution relatively quickly despite a tough public position. We flagged the next few months as the timeline to watch, but said it was quite feasible something could happen much earlier. We also predicted that rising economic and political pressures on US President Donald Trump could see Washington get directly involved by exerting pressure on Saudi Arabia and Russia. Finally, we noted that the market for extra oil was vanishing fast as lockdowns spread in the West, making it hard for Saudi Arabia to pump as much oil as threatened. This is part of a wider story of bottlenecks and backups in oil exports and storage, which are setting the stage for millions of barrels in involuntary shut-ins in the US, Canada and elsewhere. What would be considered a good result? This will probably not be a conventional Opec cut with assigned quotas -- if anything, a loose ceiling is the likely outcome. Realistically, a successful outcome would not "fix" the oil price by bringing the market back into balance -- the scale of the demand fall makes that impossible -- but rather would end the price war between Russia and Saudi Arabia that has made the demand implosion even worse. Is it all about politics? Yes and no. The Saudis could back down from their production surge, which would be significant in itself. And any production cuts are likely to be very real and very big. But cuts would be made in any case -- with or without an agreement -- as demand dries up and the world runs out of storage. It would make more sense to present these as coordinated action and extract some positive market and political benefits and limit the fallout from low prices. Saudi Arabia's Crown Prince Mohammed bin Salman, US President Donald Trump and Russia's President Vladimir Putin could all declare victory. Think of it as a political deal to manage market realities, more than a market-management deal. Will this fix the market's oversupply? A cut of about 10 million barrels per day is under discussion. Under the best circumstances, and if it could be implemented by mid-April or May 1, it might be just enough to avoid stretching global inventory capacity in the second quarter. Logistically, March already carries a surplus of 13 million b/d and April may widen that to 20 million b/d. May demand still carries downside risk. Energy Intelligence sees an offsetting 7 million b/d in production cuts coming from low prices alone, but only by June, meaning that immediate cuts in excess of 10 million b/d would likely be required to slow inventory builds. How could a deal be structured? An "Opec-plus-plus" arrangement would take producers into uncharted territory. Formal government commitments on production would be hard for some, particularly the US. In the US and Canada, softer commitments, signals or commitments from industry or authorities below the federal level are more likely. But a surprise, like a possible emergency order from the Trump administration, cannot be ruled out. How could it all play out? One scenario is that the Saudis and Russians come back to the table with a clear mandate to cut production, and the US also finds a way to contribute to the deal. Brazil, Canada and perhaps others agree to chip in. The Saudis will declare victory, claiming their tough action brought a truly global response. The result, through a fudge or real barrels, is a pledge to cut a historic 10 million b/d or higher. This would require a huge diplomatic effort, some exceptional political maneuvering in the US and some clear incentives for Moscow. It could take time to pull the details together. A second scenario would see Saudi Arabia back down from its threat to flood the market, but fail to secure a broad agreement. This might mean that Russia would attend meetings but politely decline to do much. The US would fail to pull together firm commitments. In this scenario, production would be shut in anyway as buyers evaporate and storage fills up, but without the market-supporting boost of a deal. A third scenario could see the Saudis and Russians agree to come back to the table, but without the US and others joining in. Russia would see coordination with Opec as the best way forward, given the prospect of even a slightly higher oil price. Such an agreement would be driven primarily by a reconciliation between the two countries and their leaders. This would effectively turn the clock back to the old Opec-plus arrangement. Finally, a fourth scenario could see the whole idea of a "grand bargain" collapse under the weight of massive challenges -- a potential lack of will to make tough choices, inability of the US to deliver cuts, the enormity of the 10 million b/d required and a lackluster Russian appetite for major reductions. This scenario could unfold if positions harden rather than loosen, current diplomacy stutters and the current inability to meet face-to-face, rather than via video conference, hampers dealmaking. The market response could be brutal, with prices collapsing to even lower levels. David Pike, Vancouver, and Alex Schindelar and Jill Junnola, London

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