(Bloomberg) — The Trump administration is pressing Saudi Arabia to dial back its plan to flood the oil market after a price war with Russia sent crude prices crashing to their lowest levels in almost two decades.
While its status as the world’s biggest producer means the U.S. is sheltered in part from the collapse, the administration wants Saudi Arabia to hold back on a plan to supply a record 12.3 million barrels a day next month, people familiar with the situation said. It’s asking for the Saudis’ help in bringing oil prices back to where they were before the market cratered in early March, one of the people said.
Oil prices have plummeted since Russia and Saudi Arabia failed to reach a deal to cut back production in response to an unprecedented decline in crude demand brought on by the coronavirus pandemic. The market collapse has imperiled hundreds of thousands of jobs, wiped out tens of billions of dollars in capital spending and is threatening to force as many as 70% of U.S. shale drillers into bankruptcy.
Earlier on Wednesday, the U.S. made its most direct intervention yet, with Secretary of State Michael Pompeo urging Riyadh to “rise to the occasion and reassure” energy markets at a time of economic uncertainty. Futures pared losses with Brent crude little changed near $27 a barrel.
Pompeo spoke with Crown Prince Mohammed bin Salman on the eve of a conference call between the leaders of the Group of 20 on the global pandemic and its economic fallout.
‘A Real Opportunity’
“The secretary stressed that as a leader of the G20 and an important energy leader, Saudi Arabia has a real opportunity to rise to the occasion and reassure global energy and financial markets when the world faces serious economic uncertainty,” the State Department said on Wednesday.
The U.S. view is that the oil glut aggravates an already difficult economic outlook, and it wants all nations to work together to reassure energy markets, according to an official who asked not to be named. Several discussions have already taken place with senior Saudi officials, the person said.
“This diplomacy matters,” said Jason Bordoff, director of the Center on Global Energy Policy at Columbia University and a former oil official at the White House. “Both Republican and Democrat White House administrations have asked Saudi Arabia to help the global economy during crises, and in the past they’ve responded.”
Oil is expected to be discussed on the G20 call, at least as part of discussions on the wider economy, according to a person familiar with the situation.
The price war was unleashed after Saudi Arabia failed to convince Russia to agree on deeper production cuts for the OPEC+ alliance. So far, the thinking in Riyadh remains that only a collective output cut, rather than unilateral action by the Saudis, can turn the market around.
Despite the pressure, Saudi Arabia currently has no intention of changing course, people familiar with the situation said, especially since Trump has publicly celebrated the plunge in gasoline prices and has yet to show a willingness to help cut oil production flowing from U.S. shale formations.
The magnitude of the oversupply is such that Russia and Saudi Arabia would need to completely stop all their output to balance the market. Top oil trading house Vitol Group puts the glut right now at about 20 million barrels a day.
Even as policy makers committed trillions of dollars to offset the harm from the pandemic, recent price recoveries have been short-lived as large parts of the global economy shut down. Both sides show no signs of giving up their race to flood the world with crude and grab market share.
The U.S. also tried in 1986 to convince Saudi Arabia to abandon a price war. At that time, President Ronald Reagan dispatched then-Vice President George H.W. Bush in an effort to persuade the kingdom to change course as the oil industry in Texas and Oklahoma was hammered. Bush was unable to convince Riyadh and the oil price war went for another six months.
“U.S appeals didn’t work then, even less likely to work now,” tweeted Suzanne Maloney, director of foreign policy at the Brookings Institution and a former U.S. diplomat.