A month and a half before OPEC and its allies are set to sit down and discuss how to proceed with their production cut pact, the leader of the non-OPEC partners, Russia, is sending mixed signals on its willingness to continue taking part in the supply agreement.
This is nothing new for Russia, which had dragged its feet in supporting each of the previous production deals with OPEC ever since the parties decided to team up to manage global oil supply and oil prices beginning in January 2017. After 2017, ahead of each meeting, comments and hints of top Russian officials, including Vladimir Putin, left the oil market and analysts only guessing would Moscow play ball this time around.
It did, every time.
At the meeting in December 2018, when the current oil production cut deal was forged, it was Putin—through his energy minister Alexander Novak—who sat down separately with each of the ministers of Saudi Arabia and Iran and convinced them to word the supply agreement in such a way that Iran would vote for the deal, because OPEC needs a unanimous vote to pass decisions.
Now that we are approaching the date for the revision of the pact—June 25-26—Russia is sending mixed signals once again about its commitment to the deal, again.
Not that OPEC’s members are sending unambiguous signals either.
The U.S. threw a major challenge to the cartel and allies’ supply pact by ending all sanction waivers for Iranian oil buyers, leaving the organization and the market guessing just how much supply will be lost from Iran until June and afterwards, and how much more the other OPEC members—those with spare production capacity like Saudi Arabia and the UAE—will have to potentially pump to offset the lost Iranian barrels.
Saudi Arabia says that it is prepared to meet all market demand for oil and, as always, “works toward market stability”, but it has reiterated that it wouldn’t rush in to ramp up production until it sees the actual barrels coming off the market.
However, OPEC’s task in estimating global oil supply going forward has been made more difficult by mounting uncertainty over Russian oil supplies to Europe via the Druzhba pipeline, expectations of further production declines in Venezuela, and the possibility of an outage in Libya, which is in the midst of a civil war with rival armies fighting for the capital Tripoli.
Amidst all this, Russia sent several ambiguous messages to the market last month. First, its Finance Minister Anton Siluanov said that OPEC and Russia might choose to fight for market share against the U.S., even if this means quitting the OPEC+ deal and sending oil prices significantly lower.
Then at the end of last month, Putin said that he hoped the Saudis wouldn’t break their promises under the OPEC+ deal, adding that he hadn’t heard of anyone indicating willingness to quit the agreement. As for Russia itself, it has been struggling to reduce its oil production to the agreed upon level under the pact.
Moreover, Russian oil companies have been balking at the output cuts because the OPEC+ deal has been meddling with their production growth plans. Russia’s firms benefit from higher oil production and don’t need oil prices as high as Saudi Arabia does, for example, to balance its budget.
True, Russia’s budget has benefited from the higher oil prices due to restricted production from OPEC+, but higher production is also important for Russian companies that aim to develop new oil fields and offset declines from maturing fields in the Urals region and West Siberia.
Russia’s oil firms believe that production is just as important as oil prices, Alexei Kalachev, an analyst at Moscow-based investment firm Finam, told Petroleum Economist.
Russia’s position on the OPEC+ deal will probably not be known until the very day of the meeting with OPEC at the end of June, so the market and analysts will continue to speculate on the fate of the pact for another month and a half. This time around, Russia may decide that the time has come to start developing new oil fields and ditch the pact.
Yet Putin may decide that cozying up to OPEC and its de facto leader Saudi Arabia could continue to give Russia additional power in global oil supply management without actually being part of any formal organization. The Saudis are the ones who need the higher oil prices and Russia could continue to play ball to secure additional geopolitical leverage.