Riyadh Dances With Trump But Goes Home With Putin to Prop Up Oil

Riyadh Dances With Trump But Goes Home With Putin to Prop Up Oil
When it comes to propping up global oil prices, Saudi Arabia and Russia have never been more aligned.

(Bloomberg) -- Saudi Arabia and Russia are at odds on pretty much everything: the war in Syria, policies on Iran, ties with Washington. But when it comes to propping up global oil prices, they’ve never been more aligned.

Just look at how the world’s two biggest oil producers united last week to tell markets they want to maintain output curbs for an extra nine months. Coordinated leaks and official statements from Riyadh and Moscow -- circulated even before the Saudis sit down to agree the cuts with OPEC this Thursday -- sent oil rallying more than 5 percent within days.

“It’s a question of two countries which are acutely dependent on oil,” said Igor Yusufov, who served as Russia’s energy minister from 2001-2004, the last time the nations cooperated on energy policy.

It’s more a marriage of convenience -- Vladimir Putin has never been feted like Donald Trump in Saudi Arabia. But they share an interest in urgently stabilizing the price of the commodity on which their economies, and political legitimacy, rely. In the process, Russia and Saudi Arabia are shifting the balance of power that drives the global energy market following years of waning influence from the Organization of Petroleum Exporting Countries.

Whether their alliance is strong enough to survive the test of time or unravels quickly depends heavily on how effective the anticipated extension of production cuts until March 2018 is at shoring up prices. The stakes are particularly high for Saudi Arabia as the U.S., a long-time loyal customer, cements itself as a rival producer.

The duo have compelling domestic incentives to make things work. Putin is eager to spur the Russian economy, just emerging from a two-year recession, before he seeks re-election in March 2018. Saudi Prince Mohammed bin Salman, the royal responsible for engineering an unprecedented economic overhaul, needs a sturdier oil price to boost the valuation of Saudi Aramco ahead of an initial public offering later in the year.

Brent crude has risen from about $46 to $54 a barrel since the agreement to curb output by a total of 1.8 million barrels a day was first decided in the final weeks of last year. But it’s fallen 7 percent from a peak reached during the initial rush of enthusiasm, mostly because the global glut isn’t notably easing.

Shaky History

The relationship has already been fraught with friction. While Saudi Arabia quickly delivered a cut of 600,000 barrels a day, exceeding its pledge, Russia took almost four months before meeting its vow to cut half that amount. Riyadh has, at times, grown impatient with the pace of Moscow’s compliance, according to people familiar with the Saudi thinking.

If that sounds familiar it’s because the last time the Saudis and Russians were coordinating oil policy, a five-year stretch ending in 2004, their courtship eventually collapsed because Moscow failed to make good on the cuts it promised and Riyadh got frustrated.

That was before the U.S. shale oil industry shook the power balance in the global oil market and forced crude exporters worldwide to scramble to acclimatize. Since oil started crashing in mid-2014, they have confronted budget shortfalls that forced most to dip into oil savings and borrow money.

“The first driver is all about oil revenues,” said John Browne, the executive chairman of Russian billionaire Mikhail Fridman’s investment vehicle L1 Energy and former head of BP Plc. But there’s another motivation: leveraging “the geopolitical power of energy,” he said.

Oil-industry executives, analysts and energy officials monitoring both nations said beyond money, there are calculated political motives for ending a years-long rivalry over oil.

Diplomatic Tool

Riyadh, in particular, sees crude policy as a tool to influence Russian diplomacy in the Middle East, where the Saudis and the Russians are supporting opposing sides in the wars raging in Syria and Yemen. In a show of cooperation, Putin and Prince Mohammed held a face-to-face meeting on the sidelines of the G-20 in September in China.

Prince Mohammed told the Washington Post last month that the collaboration ultimately came down to Moscow’s camaraderie with Iran, a Saudi foe. “The main objective is not to have Russia place all its cards in the region behind Iran,” the 31-year-old said in that interview.


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