Register

Peak Oil is You


Donate Bitcoins ;-) or Paypal :-)


Page added on February 22, 2019

Bookmark and Share

Cracks Begin To Form In Saudi-Russian Alliance

Cracks Begin To Form In Saudi-Russian Alliance thumbnail

Could cracks be forming in the bromance between Saudi Arabia and Russia over oil production quotas? According to one analyst, the answer could be – yes. The background for one of the biggest structural changes in global markets in recent history dates back only a few years when OPEC defacto leader Saudi Arabia mismanaged its decades-old role as global oil markets swing producer and actually ramped up production in late 2014 in response to a then saturated oil market.

The Saudi thinking at the time was straight forward. Since US shale oil producers had caused the supply overhang and since shale oil producers at the time had a relatively high oil production break-even point, the Saudis would simply turn on the oil production spigots to flood markets even more, driving prices down to points below shale producers’ break-even points, thus driving them out of business. Though the Saudis have always denied this line of reasoning, it’s apparent from their actions at the time that this was their agenda, as well as jealously protecting oil market share, especially in Europe and Asia.

Yet, that plan backfired and with OECD oil inventory levels spiking with the next year plus, prices dipped below the $30 per barrel price point by January 2016. In response, Riyadh had to not only backpedal, it also had to seek help outside of OPEC, and turn to non-OPEC members, particularly Russia, to forge the first OPEC+ deal to return markets to a semblance of equilibrium and support prices.

Fast forward just a few years and the second OPEC+ deal was reached in December and implemented in January for a period of six months with a review period to be held in April. However, this time Russia is reportedly not trimming production per terms of the new OPEC+ deal, leaving most of the heavy lifting to Saudi Arabia. Related: New Sanctions Threat Puts Russian Energy Sector On Edge

Saudi Arabia’s Energy Minister Khalid al-Falih, told CNBC in January that Moscow had moved “slower than I’d like. In response, Russian energy minster Alexander Novak, who reportedly is on al-Falih’s smart phone speed dial list, responded in kind. In early February, Novak said Russia was “completely fulfilling its obligations in line with earlier announced plans to gradually cut production by May this year.”

The numbers don’t lie

However, the numbers come down against Russia’s claims that it is shouldering its part of the new deal. Per terms of the deal, OPEC+ members agreed to cut supply by 1.2 million barrels per day(bpd). Saudi Arabia agreed to make up for most of the cut among OPEC members and has also confirmed it will drop its crude oil production by a further 400,000 bpd to 9.8 million bpd in March. If that output cut is reached, it would mean that since December (one month before implementation of the deal), Saudi Arabia has become responsible for 70 percent of the total OPEC+ target.

Russia, for its part, was supposed to account for the greater share of non-OPEC cuts, but from October to the beginning of February had only decreased output by 47,000 bpd.

Now, Torbjorn Soltvedt, principal MENA politics analyst at Verisk Maplecroft, is weighing in on the development, according to a CNBC report. In a note Tuesday, he wrote that any end to Russian-Saudi coordination would likely add significant downward pressure on prices. “Although our base case is still that Riyadh and Moscow find a compromise to extend the agreement, the pact is now looking more fragile than ever,” said Soltvedt. He added that to save the pact he expected Saudi Arabia may even have to settle for “low levels of (Russian) compliance to save the pact.”

Going forward

However, going forward, the biggest risk is not the still freshly minted bromance between Russian President Vladimir Putin and Saudi Crown Prince Mohammed bin Salman, but for global oil markets. If the OPEC+ group unravels and Russia once again turns in the oil production spigots, it would force Saudi Arabia into a weakened state, similar to where it was in early 2016, when it had to turn to non-OPEC members, and Russia, for help soaking up oil supply overhang. This dynamic, along with U.S. oil production which is poised to pass a once imaginable 12 million bpd, would not only inflate global oil inventory levels, but with significant downward pressure on prices, both Brent and West Texas Intermediate.

Likewise, a deterioration of Saudi-Russian cooperation in oil markets would also impact the two sides geopolitical interests, especially since Riyadh and Moscow are on opposite sides in the ongoing Syrian Civil War, and more importantly, on opposite sides in how to deal with Iran’s regional hegemony ambitions, as well as it ballistic missile and nuclear development ambitions.

By Tim Daiss for Oilprice.com



7 Comments on "Cracks Begin To Form In Saudi-Russian Alliance"

  1. Anonymous on Fri, 22nd Feb 2019 9:14 pm 

    SA production increase was not aimed at shale. It was aimed at rest of OPEC and Russia. Wanted to get rest of the gang to pitch in on cuts.

  2. Free Speech Forum on Sat, 23rd Feb 2019 3:16 am 

    You know the US is bad when Americans say that they feel like they have more freedom in Communist countries like Vietnam.

  3. Robert Inget on Sat, 23rd Feb 2019 11:37 am 

    KSA moves toward raw power away from democracy, (as far as possible).

    Next week in America will be Historic.
    Don’t wait for the the movies, see it live.

  4. dissident on Sat, 23rd Feb 2019 8:30 pm 

    What f*cking alliance. It is a temporary arrangement of convenience on some commodity export. Saudi Arabia is the prime backer of the Whahabi jihad that is trying to establish salafi caliphates inside Russia itself and in central Asia. This makes the Saudis Russia’s prime enemies. And since Saudi Arabia is an America protectorate that makes the USA the ultimate enemy. Not that the USA is hiding this fact.

  5. Duncan Idaho on Mon, 25th Feb 2019 11:19 am 

    The Clown Prince always needs to be soothed by his elders.
    It’s often what clowns need.

  6. Cloggie on Thu, 28th Feb 2019 1:57 am 

    “NO DEAL! Vietnam summit ends abruptly as Kim REFUSES Trump’s denuclearization demands, leaders fail to agree on lifting North Korean sanctions and abandon lunch and cancel signing ceremony”

    https://www.dailymail.co.uk/news/article-6753871/Trump-Kim-business-Vietnam-hold-day-talks-nuclear-peace-deal.html

  7. Antius on Thu, 28th Feb 2019 5:48 am 

    “NO DEAL! Vietnam summit ends abruptly as Kim REFUSES Trump’s denuclearization demands, leaders fail to agree on lifting North Korean sanctions and abandon lunch and cancel signing ceremony”

    Evidently, Kim’s puppet master Xi, believes that a belligerent North Korea is too valuable a thorn in America’s side to allow peace to be reached. So he instructed his pet puppet to make demands that he knew the US would never accept.

Leave a Reply

Your email address will not be published. Required fields are marked *