Russian President Vladimir Putin and Saudi Crown Prince Mohammed bin Salman are planning to meet Thursday ahead of next week’s important OPEC meeting, where the fate of their production deal could be decided and so could the direction of oil prices.
OPEC members and Russia over how much oil to return to the market and when.
“They’re the deciders, at the end of the day,” said Helima Croft, head of global commodities strategy at RBC.
“They can’t force the rest of OPEC to sign off, but they can go their own way. It can be just a table for two,” she said. “I find it remarkable to spend so much time listening to what Russia says OPEC policy should look like. They look like the de facto co-head of OPEC.”
The OPEC meeting on June 22 also promises to be contentious, since Iran, Iraq and Venezuela do not want to end the 18-month-old deal to withhold 1.8 million barrels a day.
While the deal was initially expected to end in December, both Saudi Arabia and Russia have said they would like to change the deal and raise production in response to outages in Venezuela and elsewhere.
Now, the U.S. sanctions on Iran, intended to remove Iranian barrels from the market, present an opportunity for OPEC and Russia to return crude to the market in the face of rising production from the United States. Iran asked to have a discussion about the sanctions included on the OPEC agenda, but it was denied, Reuters reported.
“This is a deal between OPEC and non-OPEC, not a deal between Saudi Arabia and Russia,” said Edward Morse, head of global commodities research at Citigroup. “On the OPEC side, it appears three countries — Venezuela, Iraq and Iran — don’t want to raise production. It appears the Saudis, Kuwait and the [United Arab Emirates] are aiming for a 500,000-barrel-a-day deal now and maybe 500,000 at a date when they look at the market again, maybe September.”
Morse said he believes Russia, meanwhile, wants to put 1 million barrels back on the market right away. “Nobody knows where that’s going. For all we know, the Russians are pushing the Saudis around on that,” he said.
John Kilduff of Again Capital said the public fissure in OPEC is unusual. “There’s a lot of drama around this meeting. We haven’t had that in a while. They’ve cheated, but they’ve never had this sort of public dispute, with Iran and Iraq taking sides against Saudi Arabia,” he said. He said one of the last big disagreements was between Saudi Arabia and Venezuela, before Hugo Chavez took power.
President Donald Trump has also jumped into the fray, by jabbing OPEC for oil prices that he says are too high. West Texas Intermediate crude was trading just above $ 66 per barrel Wednesday, off its recent high above $ 72 per barrel.
“There’s pressure from the U.S., which is important, but there’s pressure from Russia, which is also important,” said Morse.
Trump’s tweet drew a response from Iran, which said Trump cannot criticize OPEC while he is sanctioning two founding members, Iran and Venezuela.
“You now have in OPEC two countries that have been the subject of international sanctions and for one country, Iran, those sanctions have been supported by two members of OPEC, the UAE and Saudi. There are a whole host of divisions going into this meeting,” said Croft.
Morse said Russia is not interested in ending its deal with Saudi Arabia, though Russian companies have wanted to get out of the production agreement. Volume is more important to them because of the Russian tax structure, and they also have made new discoveries and could add a lot more oil to the market, he said.
“I think they decided their long-term interest is in institutionalizing an arrangement with Saudi Arabia, and I think it’s two governments playing cat and mouse with each other when their objectives have slowly come to diverge from one another,” said Morse. He said Russia is content with $ 60 oil, but Saudi and some other OPEC members have liked the higher prices.
Croft said the two have already been working to strengthen their arrangement. “I think what started off as an oil deal has become a trade deal. There have been so many reports on so many bilateral agreements that have been signed between Russia and Saudi Arabia on the back of the oil deal,” said Croft. “This is the new oil order.”
While Putin may be looking to strengthen the Saudi alliance, Russian companies have been complaining about the oil production agreement, because while it has driven oil prices higher that has helped the Russian government more than the industry. “The industry wants to grow; this has not allowed them to grow,” said Kilduff.
“The Russians are just slightly over their quota, and the Saudis are still slightly below theirs. The Russians also did not attend the last ministerial monitoring meeting. They’ve lost their stomach for the deal,” said Kilduff.
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