Can world leaders straighten out the mess in oil markets?

“A lot of countries, including those with strong free-market beliefs and credentials, seem to be coming over to the view that the global oil business needs to be managed to an extent, at least from time to time,” said Bhushan Bahree, an executive director at IHS Markit, a research firm.

But are the United States, Russia and Saudi Arabia ready to agree? The unusual approach underscores the turmoil in the markets.

The Origin of the Problem

Demand for oil has evaporated as commercial aircraft are grounded, road traffic has been sharply reduced and about half the world’s population is under some sort of order to stay home in order to stop the spread of the coronavirus, which has killed over 82,000 people.

The world is using about 25% less oil than it typically does, a jarring collapse in an industry known for only gradual fluctuations in demand.

But fighting among some of the largest producers has aggravated the volatility.

Instead of curtailing production to meet the reduced appetite for oil, the Saudis and allied producers ramped up output in a tiff with Moscow, as an agreement between Russia and OPEC on trimming output expired.

This helped drive low prices even lower. West Texas Intermediate, the U.S. bench mark, scraped the $20-a-barrel level in late March. Some crude in the United States fell well below $10 a barrel. Prices at this level could prove catastrophic for the U.S. shale industry — a likely goal of Saudi and Russian oil producers.

Faced with steep job losses in oil states like Texas and Oklahoma, President Donald Trump is pressuring Saudi Arabia and Russia to end their feud.

The Saudis, worried by the political flak they are taking from the United States, are showing signs that they are willing to try to find a solution.

The Saudis are thinking, “We need to get the heat off of us in terms of U.S. anger,” said Robert McNally, a White House energy adviser in the George W. Bush administration. He added, “There is a risk of a rupture there that Riyadh cannot take too lightly.”

The Saudi Strategy

Oil analysts who track Saudi Arabia said the price war with Russia had been sparked by frustration by Crown Prince Mohammed bin Salman, the kingdom’s de facto ruler, with Russia for not abiding by previous agreements on output aimed at keeping prices up.

Crown Prince Mohammed could have been looking for other benefits as well. Long term, the kingdom realizes that its vast reserves of oil could lose value as concern about climate change spreads, so it wants to get as much from its reserves as possible to invest in other sectors. The crown prince also wanted to chip away at the market share held by U.S. shale producers, whose production costs per barrel are much higher than Saudi Arabia’s.

What Russia Wants

For years, Russia had been watching nervously as a surge in shale production turned the United States from a large oil importer to an increasingly important exporter.

In the view of Russian nationalists, earlier production-cut agreements with OPEC helped Russia by lifting the global price of oil, a critical export, but also helped America’s shale oil industry.

Last month, Russia dug in its heels, seemingly at the worst possible time for oil markets. At a meeting in Vienna on March 6, the energy minister, Aleksandr Novak, refused to go along with a Saudi request for deeper production cuts, and the two countries’ 2016 oil policy agreement unraveled entirely. The rupture handed a clear victory to Igor Sechin, the head of the Russian state oil giant Rosneft, who had argued that price supports helped the Americans.

Low Prices OK, but Not This Low

It is hard to see how a global solution can be reached without the United States, now a top-three oil power.

American producers and the Trump administration share a goal: Balance the market to stabilize oil prices and save the industry from a rash of bankruptcies and the potential loss of more than 100,000 jobs. But there is little common ground on how to do that beyond industry support for Trump’s jawboning of Saudi Arabia and Russia to cut production by 10 million barrels or more.

Trump has long been a critic of OPEC and a cheerleader for lower gasoline prices. Now faced with suggestions of U.S. coordination with OPEC, he has signaled resistance to forcing American companies to drop production. A few U.S. companies, however, seek some form of coordination.

Shaping the Terms of the Deal

Analysts say producing countries are working toward an announcement of cuts on the order of 10 million to 15 million barrels a day.

Just where such cuts would come from is likely to be the subject of difficult negotiations.

Relatively straightforward trims might be found among OPEC’s members and affiliate countries. In the United States, although coordinated cuts would be unlikely, production might decline through slower drilling and planned shutdowns.

Already, U.S. oil production between January and March declined by 300,000 barrels a day to 13 million barrels, according to Energy Department estimates, and will fall by 2 million barrels more by the end of the year.

But that may not be enough for Russia, Saudi Arabia and its OPEC allies. On Wednesday, a Kremlin spokesman said natural declines in the United States should not count as cuts.

Modest Effect on Oil Glut

The cuts being discussed would probably make only a modest dent in the oversupply that is filling up global oil tanks and tankers at sea. Even a cut of up to 15 million barrels “will only be enough to scratch the surface,” said Bjornar Tonhaugen, head of oil markets at Rystad Energy, a Norwegian consultancy.