Russian
President Vladimir Putin struck a deal
with Saudi Crown Prince Mohammed Bin Salman to extend the OPEC+ agreement at
current production levels for the rest of this year and potentially into early
2020.
Speaking at the Group of 20 summit in Japan, the Russian
president said the extension of output cuts — which expire at the end of June —
could be for six or nine months. His comments make the outcome of next week’s
OPEC+ gathering in Vienna all but a foregone conclusion, and further reinforce
Putin’s role as the ultimate policy maker within the group.
Saudi Arabia and Russia ended years of animosity in 2016, joining
forces to manage the global oil market in an effort to prop up prices. The
current version of the deal by the so-called OPEC+ coalition calls for
production cuts of 1.2 million barrels a day.
“We have agreed: we will continue our agreements,” Putin said in
Osaka. “In any event we will support the continuation of agreements, both
Russia and Saudi Arabia, in the volumes previously agreed.”
The announcement marks the first time a senior leader from the
group has indicated the curbs could be needed into 2020. That reflects a somber
outlook for oil supply and demand next year due to a combination of slowing
global economic growth and rising U.S. shale output.
Trade Deal
The Russia-Saudi deal followed an agreement made earlier in Osaka between the U.S. and Chinese presidents to restart trade talks, and comments by Donald Trump that he wouldn’t impose new duties on Beijing for now.
The Russia-Saudi deal followed an agreement made earlier in Osaka between the U.S. and Chinese presidents to restart trade talks, and comments by Donald Trump that he wouldn’t impose new duties on Beijing for now.
“The Saudi-Russia deal, combined with a positive outcome from
the U.S-China trade talks at the G-20, should allow oil prices to move higher,”
said Amrita Sen, chief oil analyst at consultants Energy Aspects Ltd. in
London.
The alliance between the Organization of Petroleum Exporting
Countries and its partners has had a mixed track record of supporting oil
prices, in part because some members have at times overproduced. Since Russia
and Saudi Arabia came together to manage the market in late 2016, benchmark
Brent crude has oscillated between $45 and $85 a barrel. On Friday, Brent
futures for September closed at $64.74.
The talks between Putin and Prince Mohammed show the commitment
of the two countries to ensuring oil-market stability, Russia’s Energy Ministry
said in a statement. Their discussions also demonstrate a “high level of
understanding” between the two producers amid the current oil-market
uncertainties, it said.
For Moscow, there’s an extra incentive to extend the curbs by
nine months, as Russian oil companies struggle to raise production over the
winter. By extending the deal into 2020, Russia could be in a better position
to pump more during the spring of next year.
A long extension could also be an acknowledgment by Russia of
the impact of the massive Druzhba pipeline outage on its production capacity.
The country’s oil output has fallen in recent weeks as a result of on-off flows
through the link, parts of which were suspended two months ago amid the
contaminated-crude crisis.
This year the OPEC+ alliance has cut production by more than the
pledged 1.2 million barrels a day as U.S. sanctions on Iran and Venezuela
slashed output from both countries. Saudi Arabia also unilaterally made deeper
curbs, pumping 9.7 million barrels a day in May, compared with its OPEC+
ceiling of 10.3 million.
Saturday’s verbal agreement between Putin and Prince Mohammed
highlights the importance of the G-20 as a key policy-making forum for oil and
OPEC watchers. Last year, Putin and the crown prince used the summit in Buenos
Aires to give their political backing to extend the OPEC+ deal into the first
half of 2019. A few days later, with clear instructions from their leaders, the
respective oil ministers met and agreed on the details of cuts.
The G-20 in 2016 in Hangzhou, China, also proved pivotal for the
oil market, with Putin and the crown prince forging a rapprochement between the
world’s top two oil exporters. Since that meeting, the two nations have
cooperated on output policy as de facto leaders of the OPEC+ coalition, which
includes all the members of OPEC plus a handful of independent producers
including Mexico, Azerbaijan and Kazakhstan.
“The strategic partnership within OPEC+ has led to the
stabilization of oil markets” while supporting global economic growth, Kirill
Dmitriev, head of the Russian Direct Investment Fund, said on Saturday following
the talks.
As further proof of the importance of the G-20 for the OPEC
negotiations, Saudi Arabia and Russia recently lobbied fellow OPEC+ nations to
reschedule their Vienna meeting, shifting it by a few days so oil ministers
would gather just after Putin’s sit-down with the crown prince, rather than
before as originally planned. OPEC+ will meet in the Austrian capital on July
1-2.
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