New order in oil policy orchestrated
Saudi Arabia and Russia favour extending oil output cuts by 9 months
19 May, 2017
Russia and Saudi Arabia are orchestrating a new order in the world’s oil policy. Last Monday Saudi Energy Minister Khalid al-Falih and his Russian counterpart Aleksander Novak agreed during a meeting in Beijing that their crude production cut would be extended from the middle of this year until March 2018. The deal drove up prices by 2% the same day. At the ends of last year, the Organisation of the Petroleum Exporting Countries (OPEC) and 11 non-member countries, including Russia, agreed to curb production by 1.8m bpd for six months from 1 January to support the market and push prices to $60 per barrel. The oil ministers of Saudi Arabia and Russia said also they would consult other nations on an agreement to extend the current production deal between OPEC and non-OPEC producers by nine months. OPEC meets on 25 May in Vienna to discuss the cuts.
Russian President Vladimir Putin, who was also in Beijing, commented the decision to extend output curbs was right, RT reported. "I have met with the heads of the companies... and we support the proposal," said Putin, who noted it was right Russia was itself choosing how to approach the issue.
"For the Saudis, as for all the other exporters, low prices could really create enormous stress. They really want to solve this issue," said Daniel Yergin, vice chairman of IHS Markit.
"For the Russians, they've seen their sovereign wealth fund deplete quickly, and the oil revenues are a big part of the government budget," he said.
Saudi Arabia needs a high oil price to help its plan to diversify its economy away from crude, under its Vision 2030 plan, Helima Croft, global head of commodity strategy at RBC Capital Markets said. The cornerstone of that plan is the IPO of the state-owned energy company Saudi Aramco, which analysts say would do better with a higher oil price.
For Russia, higher oil prices have helped its economy. "This is the first year they were out of recession. … What was the only good news for Russia? The oil price. I don't think it's a coincidence they're extending it to March," said Croft.
The two floated the idea of freezing production in January of 2016 - a plan that fell apart in April after the influential Saudi deputy crown prince reportedly withdrew his support. However, that partnership re-emerged in the fall when Riyadh and Moscow agreed to jointly monitor the oil market and work to keep prices stable, Croft recalls. She doubts that the agreement to extend oil production cuts into 2018 could be accepted by an OPEC member like Iraq. OPEC's second-largest producer initially balked at the current six-month deal, asking to be exempt because it needs oil revenue to fight ISIS militants. Bagdad also quibbled over the benchmark against which the cuts would be measured.
Non-OPEC member Kazakhstan said last Monday it would struggle to join any new deal on the old terms, as its own output was set to jump. Oman said it fully supported the idea of a nine-month extension.
While OPEC and allies are cutting production, US output has risen to the highest level since August 2015 and is poised to climb further as explorers stage the longest shale drilling ramp-up since 2011, Bloomberg noted.