Is The Saudi - Russia Oil Bromance Souring?

There are things brewing within OPEC. At a meeting in Baku, Azerbaijan last week – which was meant to set the stage for a formal meeting in April to review the current supply deal among the 24-country OPEC+ block – the conclusion of the meeting was that the April meeting would be deferred. The review will now take place at OPEC’s regular meeting in Vienna in June, which is mere days before the current supply deal is scheduled to end. That’s cutting it close, but more interesting for market observers is that it points to the Saudi Arabia-Russia bromance souring.

Prior to the meeting, Saudi Arabia had gone on record to state that the Kingdom believed that OPEC’s job in rebalancing the oil market was far from over and that output cuts were necessary to continue into the second half of 2019. Defying US President Donald Trump’s Twitter tantrums – especially with the Kingdom implicated in the assassination of Saudi dissident Jamal Khashoggi – Saudi Arabia is firmly behind continuing restricted supply. In the past, Saudi Arabia would most likely to be able to bully its way into an OPEC consensus. But now, it has to deal with an equally powerful 20-ton gorilla in the same room: Russia.

The success of the OPEC+ club over the past two years has been down to this close relationship between the world’s two largest oil producers. This had allowed crude prices to recover from sub-US$50/b levels. But the latest meeting is also the latest sign that all may not be well in the friendship. First, a joint Saudi-Russia meeting at the World Economic Forum in Davos was called off. Second, February data showed that while Saudi Arabia and its allies were doing far more than necessary to cut their crude production, Russia was shuffling its feet with less than 50% adherence, claiming that it needed more time to implement the cuts. And last week, despite Saudi Arabia lobbying for an extension to the cuts and general backing from members including Iraq, Russian Energy Minister Alexander Novak was in opposition. The official reason was that OPEC+ would need clarity on market situation before planning the next move, given the disruption brought about by ongoing and developing American sanctions on Iran and Venezuela. In the absence of necessity, the two crude powerhouses have drifted back to their default positions: Saudi Arabia’s aggression and Russia’s conservatism.

So while the world waits and watches for OPEC+’s next move, the market is analysing the potential impact of a strained Saudi-Russia relationship. But necessity might bring the two back together again, since they now face a common foe – rising US crude production. OPEC’s secretary general recently met with key executives in the US shale oil industry. This was billed as a ‘friendly conversation on current industry trends’ and interpreted as an attempt to cajole American shale producers in a mutually-beneficial stabilisation of the market. It is ridiculously unlikely for the US to ever join the OPEC+ club, but if the move could convince US shale firms to temper their expansion to prevent global oversupply, it might be worth it. Because OPEC has accompanied the olive branch with a threat – if OPEC does all the work to stabilise markets only to have American shale take advantage of the situation, it could very well reverse its stance and turn the OPEC tap on full to swamp the market once again. It’s a classic example of game theory, and one to watch as the power dynamics of global oil continue to change.

Key upcoming dates for OPEC: 

• April 2019 – Review of January supply deal cancelled
• May 2019 – USA to decide on waiver extension for Iranian crude imports
• June 25, 2019 – OPEC meets in Vienna, supply deal review to be discussed
• June 30, 2019 – OPEC+ January supply deal expires

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