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A Saudi-Russia deal to cut?

Both countries want higher oil prices. But a troubled history and near-term market dynamics suggest the time is not yet ripe

Rumours of a deal between Russia and Saudi Arabia have given some recent strength to oil markets. From lows of around $27 a barrel in late January, Brent was trading above $35/b on 1 February.

It’s a neat idea, one that sees Saudi Arabia’s marketing policy in the past eighteen months as tactical, not strategic. That is, the kingdom’s willingness to keep the taps open has been a way of bringing rival producers into line – forcing cuts upon them – as opposed to the broader, much-cited strategic goal of forcing them out of business so as to hoover up market share. Saudi Arabia has given the market a good sweating, to borrow Rockefeller’s term. Now it’s time to get around the table again and rescue the price – or that’s the new theory, anyway.

This view has some historical logic. Although the fateful November 2014 meeting ended with the Saudi-led decision not to cut, the kingdom met Russia and Mexico just beforehand to discuss some kind of cooperation. Its message since then may have been about market share and not subsidising “inefficient” (Naimi’s word) producers. But back then it was at least willing to consider exactly the opposite market move. 

But some caution is called for. A deal with Russia has not been agreed. Wire reports citing Alexander Novak, Russia’s energy minister, claiming an agreement to cut 5% of supply was in place were promptly denied. Novak had merely mentioned that such a number had been mooted in previous meetings.

Although Venezuela has asked Opec’s secretariat to set up a meeting, none of the preparatory work needed to secure a deal has been done. Other Gulf producers are in no hurry either. Above all, until the true scale of Iran’s return to the market is known, Saudi Arabia is loth to start curbing its own exports and allow its rival to pick off its customers.

Political differences

Nor is it easy to see a deal emerging between Russia and Saudi Arabia – however much both share the interest of higher oil prices. Beyond oil, Moscow and Riyadh are on opposite sides geopolitically: Russia is backing the Assad regime in Syria and is becoming increasingly friendly with Iran; Saudi Arabia supports the Syrian opposition and fears the resurgent Shia in the Middle East.

Russia’s flirtation with Opec has sometimes been spurious. In Algeria in 2008, Russian officials attended the Opec meeting when the group sharply cut back to prop up prices. Igor Sechin, then a Russian deputy prime minister and now Rosneft’s head, pledged Russia’s help. But Opec cut and Russia didn’t. Within months, it had overtaken Saudi Arabia as the world’s biggest exporter. 

At the behest of Rafael Ramirez, then Venezuela’s oil minister, Sechin and Novak both turned up for the November 2014 eve-of-Opec meeting negotiations with Naimi. Mexican energy minister Pedro Joaquín Coldwell also attended. Sechin agreed to cut – and Novak promptly overruled him. Naimi left the meeting bemused.

Russia’s unreliability is one obstacle to a Saudi change in policy, but Iran’s return is an even bigger one. On 1 February, Al Hayat, a pan-Arab newspaper, quoted an oil official from the kingdom as saying Saudi Arabia would be willing to cooperate – but not for “at least two months” until Iranian volumes are known. As in 2014, Venezuela is again trying to muster broader non-Opec cooperation.

But internal Opec cooperation may, as ever, be as significant a problem. Iraq’s oil minister, in a recent interview with Petroleum Economist (published in the March issue) insisted that in the event of Opec reinstating its quota system, it was not yet time for it to adopt one. Kuwait remains bullish about its ability to see out the downturn (and its output has been cut already, thanks to Saudi Arabia’s closure of the Neutral Zone). UAE officials continue to talk about expansion plans. Libya cannot cut. Algeria and Venezuela’s contributions would be minimal. Angola must keep output high to repay loans to China. And so on. Saudi Arabia would, once again, be left to shoulder the burden of cuts.

That doesn’t make the idea impossible. But it seems unlikely in the short term that the kingdom will execute such a profound switch in policy before the good sweating is well and truly over. Until it can guarantee that others will genuinely share in voluntary cuts, Saudi Arabia may just decide to wait for the involuntary ones its policy is forcing on others – Russia included. That way the kingdom can be confident that when it does start trimming output again the market will be tightening and rivals aren’t just going to steal back customers.

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