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OPEC+ cut decision will reverberate in US oil patch, but Trump silent as election looms

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Platts Global Alert - Oil

OPEC+ cut decision will reverberate in US oil patch, but Trump silent as election looms

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Weak market has OPEC+ considering maintaining cuts

Trump administration keen to help US oil industry

OPEC sources say no outreach from Trump officials

London — As OPEC and its allies ruminate over whether to ease their collective production cuts at the end of the year, a very interested – though perhaps distracted by the US election – Trump administration will be watching closely from Washington.

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The OPEC+ agreement, forged in April during the worst of the pandemic market meltdown, saw the 23-country alliance rein in nearly 10% of global crude supply and was critical in clawing back US oil prices from negative territory to about $40/b now. The deal was a relief to the beleaguered US oil industry that President Donald Trump saw as vital to his re-election campaign.

But the cuts, already tapered once to 7.8 million b/d from 9.7 million b/d in August, are scheduled to roll back further to 5.8 million b/d starting in January.

With a second wave of coronavirus infections weighing on the oil market's outlook, the additional barrels from the quota easing, along with a ramp-up in output from Libya, threaten to undo the price recovery and hit already impaired producers around the world.

Many OPEC+ ministers appear increasingly open to keeping the current cuts in place -- a move sure to be welcomed by Trump -- though no final decision has been made and not all members are convinced, delegates have told S&P Global Platts.

The alliance will meet Nov. 30-Dec. 1 to make its determination, almost a month after the Nov. 3 US presidential election, in which Trump lags in the polls to Democratic rival Joe Biden.

Should Trump pull off a victory, he could put diplomatic pressure on OPEC+ officials, in particular with key US ally Saudi Arabia, to prevent the oil market from backsliding.

Saudi Energy Minister Prince Abdulaziz bin Salman, who has warned his counterparts of the market's shaky footing and the need to be proactive on production policy, could very well welcome any lobbying by the Trump administration, if global oil demand prospects do not improve.

So far, however, US officials have not made any outreach to Prince Abdulaziz, nor to OPEC Secretary General Mohammed Barkindo, according to sources close to both officials, who requested anonymity due to the sensitivity of the OPEC+ deliberations.

But the sources said recent dialog may have involved other officials, with US Secretary of State Mike Pompeo meeting with Saudi Foreign Minister Prince Faisal in Washington on Oct. 14 to launch the US-Saudi Strategic Dialog, which included energy among its many agenda items.

Engaging with OPEC

It was Trump who strong-armed Saudi Arabia and Russia back to the negotiating table in April after a harrowing price war to broker the OPEC+ deal on record output cuts.

Trump had long been a critic of OPEC for withholding production to support prices, but the coronavirus crisis put him on the same side as the producer bloc, with many US oil companies staring bankruptcy in the face and requesting federal aid.

US Energy Secretary Dan Brouillette was central to Trump's efforts, attending a virtual G20 energy ministerial chaired by Prince Abdulaziz that was critical to sealing the agreement, while Francis Fannon, the State Department's assistant secretary for energy resources, has also been involved in talks with OPEC members.

The US Energy Department did not respond to a request for comment. A State Department spokesman referred Platts to comments Fannon made after the OPEC+ deal was forged in April, that the US would continue to engage in dialog with OPEC+ members.

"I think we will all be monitoring it closely, constantly engaging with our partners around the world to ensure that we reduce the volatility that is in the market," he told reporters.

For now, Trump is laser-focused on his re-election campaign, and while he has accused Biden of wanting to destroy the US oil industry through environmental regulations, the president has remained silent on the OPEC+ cut tapering talks.

NYMEX crude futures have stalled around $40/b for the last several weeks, still far too low for many distressed US shale producers, who have seen a spate of mergers and acquisitions as weaker rivals are bought out.

Platts Analytics forecasts US oil production will average 11.38 million b/d in 2020 and fall to 10.24 million b/d in 2021.

"My sense is [Trump officials] are focused on more immediate need," a US source said, referring to the election.

If Biden wins the race, OPEC watchers expect a much different dynamic, with the Democrat seen as unlikely to publicly troll the organization on Twitter or berate it in speeches.

But the rise of the US as a net oil exporter thanks to shale producers, which has given the superpower added geopolitical leverage on sanctions and trade, means it cannot ignore the realities of a global oil market, according to Carole Nakhle, founder and CEO of consultancy Crystol Energy.

And that could mean continued engagement with OPEC and its partners.

"If there is a low oil price environment, the US industry will suffer," Nakhle said Oct. 22 on a panel discussion hosted by the Arab Gulf States Institute in Washington. "If being a net exporter is important to them, then they might want to support further OPEC+."