What could Saudi-Russian alliance mean for Opec?
Saudi arabia’s king Salman bin Abdulaziz Al Saud’s landmark visit to Moscow in early October, certainly captivated the world’s media. With differing stances on the Syrian conflict, and with Riyadh’s close ties to Washington, the two are far from natural allies. Yet, the budding relationship has implications for everything from arms deals, to nuclear power, writes FXTM’s VP of Corporate Development and Market Research, Jameel Ahmad.
Saudi has traditionally been very closely aligned to the US, spending billions of dollars on American defence systems. But US policy has shifted since November 8, 2016; a protectionist stance is pervading Washington, and policy is becoming increasingly unpredictable. Whether this is the catalyst behind Saudi Arabia expanding its list of weapons suppliers is speculative, but Russia is a major global exporter of arms. Plus, it has the capability to ensure Saudi realises its nuclear power aspirations.
These two countries collectively account for nearly half of all crude oil production, and both stand to gain from ongoing production cuts long term. It’s been over three years since oil first fell below $100 per barrel, so there is speculation that the purpose of the meeting focussed heavily on the commodity and possible measures to address oversupply.
When he left on Saturday, King Salman’s visit was hailed as pivotal for not just oil, but trade, investment and infrastructure. The two super powers reportedly signed fifteen agreements, including a weapons trade deal. Perhaps most significantly, notwithstanding the huge mutual investment commitments, was an agreement between Russian Direct Investment Fund (RDIF) — Russia’s leading gas processing and petrochemical company — and Saudi Aramco.
Implications for Opec
Saudi Arabia and Russia both have a significant influence over the oil markets. Russia, a non-Opec member, also holds increasing sway over Opec strategy, with Energy Minister Alexander Novak widely rumoured to be the chief architect of May’s extension to the output deal. While 2017 has seen record adherence to production cuts, members including Iraq, are still struggling to comply with Opec limits. The result has been ongoing negativity towards the strategy from investors. As such, speculation is rife that Riyadh and Moscow are discussing ways to ensure compliance.
Personally, I think Saudi Arabia is viewing Russia as a valuable ally. Not just in helping to push the oil price higher — a cause Saudi has shown nothing but enthusiasm for — but also in trade. The alliance would open up new opportunities for Russia, and potentially increase its influence in the Middle East region. The markets are already anticipating a further extension to the Opec and non-Opec production cuts. A united Russia and Saudi Arabia could mean even greater production cuts are on the cards for producers. There has been no disputing the commitment Saudi Arabia has shown in the past towards achieving stability in the oil markets, and the recent news following the meeting in Moscow that Saudi Aramco is set to make its deepest customer allocation cuts to crude oil in its history, shows once again how committed Saudi Arabia is towards reducing the ongoing oversupply of oil in the market.
With the next Opec meeting scheduled for November 30 in Vienna, investors should prepare for some interesting headlines. There has already been one surprise ahead of the upcoming meeting, where Opec Secretary General Mohammad Barkindo unexpectedly called on US shale producers to join forces with Opec to reduce the ongoing oversupply in the market.
The fact that Opec and US shale producers have been at odds in a production war for nearly the past three years, it would be a major surprise to everyone if they joined forces. However, the same could have been said about Opec collaborating with non-Opec members, so perhaps we shouldn’t completely rule this option out.
The Turkish Lira took an unexpected dive at the start of the week, declining sharply against the greenback as the US and Turkey entered a ‘tit for tat’ suspension of non-immigrant visa processing. The latest diplomatic tensions to dog the Trump administration, are thought to originate from last week’s arrest of a Turkish citizen in the American consulate in Istanbul, although these reports are yet to be confirmed by either embassy.
The Turkish lira hit a low on Monday of 3.85 against the dollar and currencies like the dirham, which are pegged to the greenback, charted an increase of six per cent on the TRY. However, the weakness was short lived, and the Lira launched an immediate — if slow — recovery, hitting TRY3.7077 by close of trade on Monday. Tuesday was a similar story, and TRY held firm to 0.25 per cent gains.
Political risk premium is likely to keep the lira low against US dollar and, by extension, dirham; but the currency is already recovering, suggesting Monday’s initial losses were a flash crash. There is some disagreement among analysts as to the long-term health of the lira and Turkish assets, but I remain convinced that TRY is a significantly undervalued emerging market currency. Their banking system is healthy, inflation is stable, and the public debt to GDP ratio is at historically low levels. It would appear that the sentiment towards the lira is based on past examples of political risk inside Turkey.