Saudi Arabia hopes to extend production cuts beyond their expiry at the end of June
A year ago, on one of St. Petersburg’s famous “white nights” of summer, Saudi Arabia and Russia reached an agreement that set a new direction for the oil market.
This week, when Energy Ministers Alexander Novak and Khalid Al-Falih meet again in the northerly city that’s President Vladimir Putin’s hometown, resolving their differences may not be so easy for the two architects of the OPEC+ agreement. The Saudis clearly want to extend the group’s production curbs beyond their expiry at the end of this month, but Russia has been at best non-committal.
Right now, they can’t even persuade the rest of the group to agree on a date for the group’s usual mid-year meeting in Vienna.
Diverging interests and surging market volatility are making their decisions more difficult. Oil is torn between the bearish influence of US-instigated trade wars and the bullish threat of supply disruptions from Iran to Venezuela. While Saudi Arabia needs higher prices and has enthusiastically reduced production, the benefits for Russia aren’t so clear and it was slower to make the cuts.
“I would expect a stronger message from Al-Falih” on extending the cuts, said Giovanni Staunovo, an oil analyst at UBS Group AG in Zurich. “Novak will keep all options open.”
Novak and Al-Falih will come to St. Petersburg, Russia’s second-largest city, to participate in the International Economic Forum hosted by Putin. That will be the first face-to-face meeting between the two ministers since Jeddah in May, when the gap between their interests became visible.
Putin, who has the final word on Russia’s policy of cooperation with the Organization of Petroleum Exporting Countries, will make a keynote speech at the forum on Friday, according to the official program. Most recently, in April, he was vague on whether the nation would support an extension, saying that a lot will “depend on the market situation.”
The president so far has no plans for bilateral talks with the Saudi delegation, his aide Yuri Ushakov told reporters on Tuesday. He didn’t rule out “a contact” with Al-Falih on the sidelines of the forum as there may be “unplanned meetings.” In any case, Al-Falih may have a chance to talk to Putin at a Thursday evening meeting the Russian leader traditionally holds for foreign investors.
Putin’s closest oil ally, Rosneft PJSC Chief Executive Officer Igor Sechin, has long been skeptical of the benefits of OPEC cooperation and renewed his criticism this week. Russia’s share of the global oil market is already under threat due to interruptions in exports to Europe after the Druzhba pipeline became contaminated with chemicals, Sechin said. If Russia continues to cap its oil output, rival US producers will “fill the void and take up the market share,” he said.
Last month, Finance Minister Anton Siluanov said Russia will need to weigh all the pros and cons of extending the pact. The nation’s official statistics show the deal hurting the nation’s economy in the first quarter.
Still, in his most recent interview to Saudi Press Agency, Al-Falih said he sees “an emerging consensus among OPEC+ countries” on cooperation in the second half of this year.
Oil prices have slumped more than 10 percenr in the past month as fears of a global trade war overrode any concerns about supply disruption. That may bring the group together again in time for the meeting in Vienna, said Dmitry Marinchenko, senior director at Fitch Ratings.
“If OPEC+ shifts to production ramp-ups as the global economic growth is potentially slowing, this may bring the oil prices further down,” he said. “Nobody wants it, including Russia.”