For the second time in a year, Saudi Arabia is probably trying to persuade Russia to enter into a formal pact with OPEC to control global crude exports and prices. Once again, Moscow can stop and eventually reject the idea, which seems to benefit the Saudi interests more than its own and could damage Russia's oil industry's long-term competitiveness.
To address the dual threat of cheap gushing US shale oil and President Donald Trump's pressure on OPEC as well as keeping its prices low, Riyadh and the Persian Gulf Allies support a formal partnership with a 10-nation oil-producing group led by Russia. reported the Wall Street Journal Tuesday.
WTI weekly chart
The so-called OPEC + 10 alliance has succeeded twice in the past three years to bring back oil prices from multi-year recessions: the first in 2016, when dropped to nearly $ 25 barrel, and the second since December when it poured under $ 43 . This week, WTI shot over $ 55.
In both market busts, shale overproduction was primarily responsible, but last year's crash was also contributed by Trump, who issued unexpected exceptions to Iranian oil sanctions to supply to global supplies, aggravated the damage by tweeting that OPEC should not try and Increase prices. And both times it was Russia that finally helped save the market by joining Saudis in cutting production.
Saudis is looking for a better fix for slate, drum hair
The desire to find a long-term, if not permanent solution to the slate and drum problems, would propose and debate the Saudi-led oil-oil exporting organization at its next meeting in Vienna next February 18 – a formal OPEC + 10 event that works proactively to keep prices at all times supported, rather than simply responding to market crashes.
If accepted at the OPEC level, the draft plan could be developed into a final agreement when the cartel meets with the + 10 group in April, the WSJ said.
The document adds that a spokeswoman for a Russian energy minister did not respond to a request for comment. There is another good reason why. The current plan is an emigrated version of a former gambit of Riyadh in June 2018 to create a new OPEC-like structure with Saudi Arabia and Russia as general members. After six months of chewing it, Moscow rejected this idea.
To understand why Russia is not hot to belong to an oil cartel – despite the cooperation with OPEC – one must understand what drives its oil industry. Like OPEC's 14 members, Russia has a national oil company, Rosneft, and an energy minister, Alexander Novak. But it has also privately owned multinational energy companies such as Lukoil, operating on a commercial basis and growing by competing for customers.
In a weak market, commercial oil companies will try to sell more barrels at a lower price than trying to sell less at a higher price. In other words, they are no different than the American shale operators. Only state-owned oil companies play for a limited supply, and the Saudis lead the OPEC playbook on this.
In light of the similarity between their shed and the shale industry, the Russians are well aware that US competition cannot be beaten despite OPEC's best efforts. US oil production continues to grow, crude exports continue to expand and new pipelines to transport oil within and outside the country are being added and accelerated.
The US Energy Information Administration says that by 2025, the United States could produce more oil and liquids than Russia and Saudi Arabia combined.
Russians aware of saudi games
John Kilduff, founder of the New York Energy Hedge Fund Again Capital, looked like the idea of tying Russia down to OPEC rules like "carrying a horse to water but not making it drink."
To make his point, Kilduff quoted Russia's statement before agreeing on current co-operation on production cuts between the + 10 group of oil producers it leads and OPEC. He added:
"The Russians know that when they are forced to proactively tighten their supplies in support of prices, they will only promote more barrels from other competitors who do not play such rules."
And while the Saudis have absorbed most of the cutbacks in recent OPEC + 10 efforts to balance the market, Kilduff also sees as an effective ruse driving home the "higher prices all benefit" concept, as Riyadh must protect its market share, especially in lucrative Southeast Asia.
"We continue to hear that the Saudis are cutting their harsh crude exports to the United States. What we are recalling is how hard they struggle to keep barrels of light they sell to Asia, the same kind of oil that US slate can compete with. "
"The Asian market is where the Saudis make the most money and they do not want to lose the golden goose. They are afraid of American raw food in that market share. From China to Korea, Japan and India, Asians have been willing buyers all over America's slate. "
"By making the Russians reduce their light crude exports under global cuts, the Saudis also get help to maintain their Asian market share. Last but not least, the Saudis need oil to be over $ 80 a barrel. The Russians can do with just over $ 40. They don't need OPEC. "
"Come on the president!"
So what could happen to the Saudi plan for a formula OPEC + 10?
The Russians could in principle consider the idea without a final schedule in a face-saving gesture.
Meanwhile, the informal alliance could show Trump that it is fighting its tweets more decisively.
Phil Flynn, analyst at The Price Futures Group Brokerage in Chicago, said: "Come on the president. OPEC and Russia can make it officially!"