U.S. oil industry regulators opened a dialogue with OPEC in talks that could help foster a truce between the world’s three largest oil producers and potentially resolve a Saudi-Russian price war that has devastated oil markets in recent weeks, according to people familiar with the matter.
Mohammed Barkindo, secretary-general of the Organization of the Petroleum Exporting Countries, spoke Friday with Ryan Sitton, the Texas railroad commissioner who oversees the U.S.’s biggest oil patch, these people said.
“Just got off the phone with OPEC SG Moh[ammed] Barkindo. Great conversation on global supply and demand,” Mr. Sitton said on Twitter. “We all agree an international deal must get done to ensure economic stability as we recover from COVID-19.“ The Texan official said the OPEC chief had invited him to the next meeting of the organization in June.
U.S. antitrust laws prevent a formal deal and there is no suggestion the two sides would coordinate on production decisions. But the Texas regulator is considering curtailing output in America’s largest oil-producing state for the first time in decades, people familiar with the matter have previously said.
Mr. Sitton said he would gauge international reaction to the idea of production cuts before deciding how to proceed. “I’m not advocating for Texas to do anything on its own,” he said.
Meanwhile, Wayne Christian, the Texas commission’s chairman, said he has a number of reservations about a production curtailment.
Shale-oil companies, which are heavily in debt and produce at a higher break-even price compared with conventional Russia and Saudi producers, have been hit hard by the slump.
That has led in recent days to stepped-up U.S. engagement with OPEC—which President Trump has often accused of anticompetitive behavior. U.S. shale companies have complained to Mr. Barkindo about collapsing oil prices and he has also spoken to Frank Fannon, the senior State Department official in charge of energy matters, according to Saudi officials.
Earlier this month, Saudi-led OPEC and Russia were unable to reach a deal on reducing output in response to the coronavirus pandemic, Moscow decided to target U.S. shale production with lower oil prices but was taken aback by Riyadh’s harsh response: price cuts and production hikes that triggered an oil-price collapse below $30 a barrel.
A decision by American producers to reduce output would help the Kremlin claim a victory and spur Russia to resume talks with Saudi Arabia, Saudi officials said.
Saudi officials expect Russia will ultimately return to the table as lower crude prices dent its economy, but only if it can present the oil diplomacy as a face-saving move, according to officials in the kingdom.
A Saudi official said “the perfect [scenario] would be the U.S. giving their word over this and that would make it easier to convince everyone to cooperate.”
Separately, the U.S. is considering other avenues to alleviate the pressure on American oil producers. The Trump administration is considering a diplomatic push to get the Saudis to cut oil production in tandem with threats of sanctions on Russia, people familiar with the matter said.
An output cut by U.S. producers is unlikely to prompt a swift resolution of the Saudi-Russian spat, say Saudi officials. Saudi Arabia has so far refused to confirm its attendance for the OPEC meetings planned for early June, arguing the gatherings would serve no purpose if Russia isn’t ready to cut production, according to Persian Gulf officials.
In Russia, oil companies are also struggling with lower crude prices. Many producers there could begin hemorrhaging cash if prices remain below $30 a barrel and some, like state-run giant Rosneft, are also stifled by U.S. sanctions tied to the annexation of Crimea.
Russia would like to see higher oil prices and is always ready to talk, Kremlin spokesman Dmitry Peskov said this week, “especially in such dramatic times.” The country says it can hold up at $25 a barrel but analysts say prices could fall further as overproduction goes into storage rather than being consumed as the pandemic saps demand.
Saudi Arabia won’t be able to keep up its price war for too long, say officials familiar with the matter. The kingdom has been forced to cut its budget but needs benchmark oil prices over $60 a barrel to sustain an ambitious reform program. As part of its announced price-war plan it is set to boost supplies to customers by 2.5 million barrels a day to offset the effect of lower prices. But that level won’t be sustainable beyond June, Saudi officials said.
The price war and ensuing oil-market rout mean that when the Saudis and OPEC meet again, the group will likely seek production cuts much larger than the ones Russia refused earlier this month, officials in the cartel said. That is because demand is set to collapse globally as the impact of the outbreak moves from East Asia to Western Europe and the U.S.
“If there is a meeting a significant cut is needed. We are way past the cut we wanted a few weeks ago,” said a senior Saudi official.
The cartel may propose cumulative, collective cuts of six million barrels a day, rather than the 3.6 million barrels a day it was ready to accept earlier this month, said one non-Saudi OPEC official.
“Russia would have to cut more than the cosmetic cuts they have been getting away with for a very long time,” said the Saudi official.
—Rebecca Elliott in Houston, David Hodari in London and Tim Puko in Washington, D.C. contributed to this article.
6m barrels cut ... wow!