Setting differences aside, Saudi-Russian courtship underpins oil prices
LONDON: Saudi Arabia and Russia are at odds on pretty much everything: the war in Syria, policies on Iran, ties with Washington.
But when it comes to propping up global oil prices, they’ve never been more aligned.
Just look at how the world’s two biggest oil producers united this month to tell markets they want to maintain output curbs for an extra nine months. Coordinated leaks and official statements from Riyadh and Moscow – circulated even before the Saudis sit down to agree the cuts with O pec this Thursday – sent oil rallying more than 5% within days.
“It’s a question of two countries which are acutely dependent on oil,” said Igor Yusufov, who served as Russia’s energy minister from 2001-2004, the last time the nations cooperated on energy policy.
Their marriage of convenience was borne out of a shared urgency to stabilise the price of the commodity on which their economies, and political legitimacy, rely. In the process, Russia and Saudi Arabia are shifting the balance of power that drives the global energy market following years of waning influence from the O rganisation of the Petroleum Exporting Countries.
Whether their alliance is strong enough to survive the test of time or unravels quickly depends heavily on how effective the anticipated extension of production cuts until March 2018 is at shoring up prices. The stakes are particularly high for Saudi Arabia as the US, a long-time loyal customer, cements itself as a rival producer.
The duo have compelling domestic incentives to make things work. Vladimir Putin is eager to spur the Russian economy, just emerging from a two-year recession, before he seeks re-election in March 2018. Saudi Prince Mohammed Salman, the royal responsible for engineering an unprecedented economic overhaul, needs a sturdier oil price to boost the valuation of Saudi Aramco ahead of an initial public offering later in the year.
Brent crude has risen from US$46 to US$53 a barrel since the agreement to curb output by a total of 1.8 million barrels a day was first decided in the final weeks of last year. But it’s fallen 8% from a peak reached during the initial rush of enthusiasm, mostly because the global glut isn’t notably easing.
Frictions between the pair have already emerged. While Saudi Arabia quickly delivered a cut of 600,000 barrels a day, exceeding its pledge, Russia took almost four months before meeting its vow to cut half that amount. Riyadh has, at times, grown impatient with the pace of Moscow’s compliance, according to people familiar with the Saudi thinking.
If that sounds familiar it’s because the last time the Saudis and Russians were coordinating oil policy, a fiveyear stretch ending in 2004, their courtship eventually collapsed because Moscow failed to make good on the cuts it promised and Riyadh got frustrated.
That was before the US shale oil industry shook the power balance in the global oil market and forced crude exporters worldwide to scramble to acclimatise. Since oil started crashing in mid-2014, they have confronted budget shortfalls that forced most to dip into oil savings and borrow money.
“The first driver is all about oil revenues,” said John Browne, the executive chairman of Russian billionaire Mikhail Fridman’s investment vehicle L1 Energy and former head of BP Plc. But there’s another motivation: leveraging “the geopo- litical power of energy,” he said.
O il-industry executives, analysts and energy officials monitoring both nations said beyond money, there are calculated political motives for ending a years-long rivalry over oil.
Riyadh, in particular, sees crude policy as a tool to influence Russian diplomacy in the Middle East, where the Saudis and the Russians are supporting opposing sides in the wars raging in Syria and Yemen. In a show of cooperation, Putin and Prince Mohammed held a face-toface meeting on the sidelines of the G-20 in September in China. Prince Mohammed told the
Washington Post last month that the collaboration ultimately came down to Moscow’s camaraderie with Iran, a Saudi foe. “The main objective is not to have Russia place all its cards in the region behind Iran,” the 31-year-old said in that interview.
Moscow, meanwhile, is seeking a role in tumultuous Middle East for the first time since the Soviet Union collapsed in 1991, often clashing with the US.
For oil traders, the alliance has altered the playing field. After spending years hanging on every word of Middle Eastern oil officials on the sidelines of O pec meetings in Viennese hotels, they’re now keeping closer watch of late-night comments out of the Kremlin.
The U-turn in relations comes after a decade of antagonism over energy policy, with Russia notably refusing to work with the Saudis to stabilise prices in 2008, when the price of a barrel of crude slid by more than US$100 in five months.
As recently as a meeting in Vienna in November 2014, then Saudi O il Minister Ali Al-Naimi and Igor Sechin, a Putin ally who runs state-controlled oil giant Rosneft PJSC, clashed over how to manage oil production. Sechin had ruled out curbs, saying Russian companies would struggle to reduce output during the cold Siberian winter. Naimi didn’t hide his anger.
“It looks like nobody can cut, so I think the meeting is over,” he said, according to his memoirs.
The latest alliance has new faces: Russian Energy Minister Alexander Novak and Khalid Al-Falih, who succeeded Naimi after he retired in May 2016. About six months later, the two were key in getting about two dozen countries to trim production. They talk on the phone often and have held several joint press conferences. A number of times, including this month, they’ve coordinated statements and leaks to talk up oil prices.
But the relationship could break down as quickly as it was forged. Shale production is surging so fast that America’s crude output is projected to reach records exceeding 10 million barrels a day next year, according to the Energy Information Administration. That’s more than Saudi Arabia is pumping at the moment.
The trend won’t do much to inspire Russian-Saudi symbiosis. In recent days, Sechin called on the Russian government to draw up a plan for an orderly exit from the cuts and pledged to be “ready for a competitive battle.” Rosneft had already warned in March of the “risk of a resumption in the price war”.
If US producers can’t be persuaded to limit supply alongside the Saudis and Russians, the resulting battle for market share could “destroy the market,” Yusufov, the former Russian minister, warned. – Bloomberg