Saudi-Russian Oil Fling Becomes Marriage

Saudi-Russian Oil Fling Becomes Marriage
It was supposed to be a six-month fling, but Saudi Arabia and Russia have instead signed up for eternity.

(Bloomberg) -- It was supposed to be a six-month fling, but Saudi Arabia and Russia have instead signed up for eternity.

Complete with poem and celebratory badges, Moscow and Riyadh led two dozen countries in signing a charter to formalize the OPEC+ group that for the past 2 1/2 years has coordinated supply to prop up the price of oil.

OPEC Secretary General Mohammad Barkindo compared the pact to a “Catholic marriage,” saying it would last for “eternity.”

“The charter may end the perennial questions of whether Russia-Saudi is a relationship built to last,” said Helima Croft, chief commodities strategist at RBC Capital Markets. “The charter is the ring in the relationship.”

It was a moment that would have been hardly imaginable three years ago, when decades of distrust were poisoning relations between the world’s two largest oil exporters as prices languished. In late 2016, in the face of skepticism from analysts and some senior figures in both countries, Khalid Al-Falih of Saudi Arabia and Russia’s Alexander Novak promised the output cuts they’d agreed on would last just six months.

Oil Diplomacy

This week, the group agreed to extend the cuts into a fourth year, to March 2020. But signing the charter was a key moment in a much broader Saudi-Russian diplomatic effort.

It was Russian President Vladimir Putin who first telegraphed the result of the OPEC+ meeting, after discussions with Saudi Crown Prince Mohammad bin Salman in Osaka on Saturday. And when Putin visits Saudi Arabia later in the year, Riyadh is planning to invite other heads of state from the OPEC+ group for a signing ceremony of the charter.

For Saudi Arabia, turning what had been an ad hoc coalition into a formal group provides a hedge against future oil-market turbulence. The kingdom can now lean on a group representing almost half of global oil output for support.

For Russia, the formalization of the group helps expand Putin’s influence in the Middle East. That’s a blow to the U.S., which has spoken out against Russia’s growing clout in the region. “I am very confident that Vladimir Putin’s efforts will fail,” said Secretary of State Mike Pompeo when asked earlier this year whether the Russian president could use oil diplomacy to supplant the U.S. in the Middle East.

The charter is, implicitly, a recognition of the long-term nature of the problem facing Saudi Arabia and the other major oil producers. Oil slid on Tuesday in spite of the agreement, with West Texas Intermediate and Brent dropping 4.8% and 4.1%, respectively. Prices edged higher on Wednesday.

Breakneck growth in U.S. shale oil production, combined with worries about slowing demand growth, mean that the OPEC+ group has little choice but to continue its cuts or see prices plunge.

Al-Falih acknowledged as much, saying that oil producers would need to “keep adjusting” until U.S. shale production eventually peaked.

That’s a particularly painful reality for Saudi Arabia, which is doing the bulk of the cutting. Russian output in June of 11.155 million barrels a day is just 0.5% below its level in December 2016, before the cuts deal began. Saudi Arabia’s oil production, on the other hand, is more than 7% lower over the same period.

“Russia pulls the strings while Saudi output swings,” said Roger Diwan, a veteran OPEC-watcher at IHS Markit Ltd.


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Doc monical  |  July 07, 2019
Since USA is now largest crude oil producer, Saudi Arabia & Russia is a forced partnership with the Saudis accepting the desperate olive branch from Russia in order to keep oil prices above a minimum $55.00. Russia’s lifting cost are not near as efficient as Saudi’s or USA’s. Our military support in the Middle East in especially Saudi should continue to provide a greater influence the Russia, especially considering Iranian & Russia ties.
Andre Gurses  |  July 05, 2019
I have 25 years Oil&Gas MS+MBA.I appreciate Saudi+Russia Governments doing best 4 country interest. I am NOT happy our shale business giving $$ few greedies selling crude+LNG. We should keep 4 us.
Rudolf Huber  |  July 04, 2019
Historically, it has never been a good idea for the dinosaurs to team up in order to do more of the same while an upstart eats their lunch from under their claws. Traditional producers are being sledgehammered by shale and they just can't understand the dynamics at play. Their world is big, corporate, long term big style projects with huge bureaucracies running intricate web-like structures of distribution. Shale, on the other side, is quick, nimble, reactive, flat, dynamic, entrepreneurial and does not pay any heed to old structures. The old emperors can cling on for a long time, live off the substance they still have - or believe they have but their own weight will be their undoing. While shale goes through a ring of fire cleaning itself of fluff, others fluff up to unseen proportions.
McGinn Donald  |  July 03, 2019
Anything the limits the USA’s bullying attempts in dominance in any sector is all good! Great news!